Sears 2007 Annual Report Download - page 59

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
the reporting period. We evaluate our estimates and assumptions on an ongoing basis using historical experience
and other factors that management believes to be reasonable under the circumstances. Adjustments to estimates
and assumptions are made when facts and circumstances dictate. As future events and their effects cannot be
determined with absolute certainty, actual results may differ from the estimates used in preparing the
accompanying consolidated financial statements. Significant estimates and assumptions are required as part of
determining inventory valuation, estimating depreciation, amortization and recoverability of long-lived assets,
establishing self-insurance, warranty, legal and other reserves, performing annual goodwill and long-lived asset
impairment analysis, establishing valuation allowances on deferred income tax assets and reserves for tax
examination exposures, and calculating retirement benefits.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with original maturities of three months or less at the
date of purchase. We also include within cash equivalents deposits in-transit from banks for payments related to
third-party credit card and debit card transactions.
We classify outstanding checks in excess of funds on deposit within other current liabilities and reduce cash
and cash equivalents when these checks clear the bank on which they were drawn. Outstanding checks in excess
of funds on deposit included in other current liabilities were $405 million and $353 million at February 2, 2008
and February 3, 2007, respectively.
Allowance for Doubtful Accounts
We provide an allowance for doubtful accounts based on both historical experience and a specific
identification basis. Allowances for doubtful accounts on accounts receivable balances were $37 million and
$29 million as of February 2, 2008 and February 3, 2007, respectively. Our accounts receivable balance is
comprised of various vendor-related and customer-related accounts receivable, including receivables related to
our pharmacy operations.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market. For Kmart and Sears Domestic, cost is
primarily determined using the retail inventory method (“RIM”). Kmart merchandise inventories are valued
under the RIM using primarily a first-in, first-out (“FIFO”) cost flow assumption. Sears Domestic merchandise
inventories are valued under the RIM using primarily a last-in, first-out (“LIFO”) cost flow assumption. For
Sears Canada, cost is determined using the average cost method, based on individual items.
Inherent in the RIM calculation are certain significant management judgments and estimates including,
among others, merchandise markons, markups, markdowns and shrinkage, which significantly impact the ending
inventory valuation at cost as well as resulting gross margins. The methodologies utilized by us in our application
of the RIM are consistent for all periods presented. Such methodologies include the development of the
cost-to-retail ratios, the groupings of homogenous classes of merchandise, the development of shrinkage and
obsolescence reserves, the accounting for price changes and the computations inherent in the LIFO adjustment
(where applicable). Management believes that our RIM provides an inventory valuation that reasonably
approximates cost and results in carrying inventory at the lower of cost or market.
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