Radio Shack 2009 Annual Report Download - page 44

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Judgments and uncertainties involved in the estimate
Our revenue recognition accounting methodology contains uncertainties because it requires us to
estimate future sales returns and service plan deactivations. These estimates are subject to management
judgment. Our estimate for product refunds and returns, service plan deactivations, residual revenue and
commission revenue adjustments are based on historical information pertaining to these items. Based on
our extensive history in selling activated wireless telephone handsets, we have been able to establish
reliable deactivation estimates.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to estimate sales returns or service
deactivations during the past three fiscal years, and we do not believe there is a reasonable likelihood
that there will be a material change in the future estimates or assumptions for these items. However, if
actual results differ from our estimates due to various factors, the amount of revenue recorded could be
materially affected. A 10% difference in our reserves for the estimates noted above would have affected
net sales and operating revenues by approximately $4.1 million in 2009.
Inventory Valuation
Description
Our inventory consists primarily of finished goods available for sale at our retail locations or within our
distribution centers and is recorded at the lower of average cost (which approximates FIFO) or market.
The cost components recorded within inventory are the vendor invoice cost and certain allocated freight,
distribution, warehousing and other costs relating to merchandise acquisition required to bring the
merchandise from the vendor to the location where it is offered for sale.
Judgments and uncertainties involved in the estimate
Typically, the market value of our inventory is higher than its aggregate cost. Determination of the market
value may be very complex and, therefore, requires a high degree of judgment. In order for management
to make the appropriate determination of market value, the following items are commonly considered:
inventory turnover statistics, current selling prices, seasonality factors, consumer trends, competitive
pricing, performance of similar products or accessories, planned promotional incentives, technological
obsolescence, and estimated costs to sell or dispose of merchandise such as sales commissions.
If the estimated market value, calculated as the amount we expect to realize, net of estimated selling
costs, from the ultimate sale or disposal of the inventory, is determined to be less than the recorded cost,
we record a provision to reduce the carrying amount of the inventory item to its net realizable value.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to establish our inventory valuation or
the related reserves during the past three fiscal years, and we do not believe there is a reasonable
likelihood that there will be a material change in the future estimates or assumptions we use to estimate
our inventory valuation reserves. Differences between management estimates and actual performance
and pricing of our merchandise could result in inventory valuations that differ from the amount recorded at
the financial statement date and could also cause fluctuations in the amount of recorded cost of products
sold. If our estimates regarding market value are inaccurate or changes in consumer demand affect
certain products in an unforeseen manner, we may be exposed to material losses or gains in excess of
our established valuation reserve. We believe that we have sufficient current and historical knowledge to
record reasonable estimates for our inventory valuation reserves. However, it is possible that actual
results could differ from recorded reserves.
Estimation of Reserves and Valuation Allowances
Description
The amount of liability we record for claims related to insurance, tax and legal contingencies requires us
to make judgments about the amount of expenses that will ultimately be incurred. We are insured for
certain losses related to workers' compensation, property and other liability claims, with deductibles up to
$1.0 million per occurrence. This insurance coverage limits our exposure for any catastrophic claims that