Sears 2008 Annual Report Download - page 61

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Cost of Sales, Buying and Occupancy Costs
Cost of sales, buying and occupancy are comprised principally of the costs of merchandise, buying,
warehousing and distribution (including receiving and store delivery costs), retail store occupancy costs, product
repair, and home service and installation costs, customer shipping and handling costs, vendor allowances,
markdowns and physical inventory losses.
Selling and Administrative Expenses
Selling and administrative expenses are comprised principally of payroll and benefits costs for retail and
corporate employees, occupancy costs of corporate facilities, advertising, pre-opening costs and other
administrative expenses.
Pre-Opening Costs
Pre-opening and start-up activity costs are expensed in the period in which they occur.
Advertising Costs
Advertising costs are expensed as incurred, generally the first time the advertising occurs, and amounted to
$2.1 billion, $2.2 billion, and $2.2 billion for fiscal 2008, fiscal 2007, and fiscal 2006, respectively. These costs
are included within selling and administrative expenses in the accompanying consolidated statements of income.
Income Taxes
We account for income taxes under SFAS No. 109 and FIN 48. Accordingly, we provide deferred income
tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax
basis of assets and liabilities based on currently enacted tax laws. The tax balances and income tax expense
recognized by us are based on management’s interpretation of the tax laws of multiple jurisdictions. Income tax
expense also reflects our best estimates and assumptions regarding, among other things, the level of future
taxable income and tax planning. Future changes in tax laws, changes in projected levels of taxable income, tax
planning, and adoption and implementation of new accounting standards could impact the effective tax rate and
tax balances recorded by us.
Stock-based Compensation
We account for stock-based compensation arrangements in accordance with SFAS No. 123(R), “Share-
Based Payments.” SFAS 123(R) requires us to recognize as expense the fair value of all stock-based
compensation awards (which includes stock options) and to classify excess tax benefits associated with share-
based compensation deductions as cash from financing activities rather than cash from operating activities. We
recognize compensation expense as awards vest on a straight-line basis over the requisite service period of the
award.
Earnings Per Common Share
Basic earnings per common share is calculated by dividing net income available to common shareholders by
the weighted average number of common shares outstanding for each period. Diluted earnings per common share
also includes the dilutive effect of potential common shares, exercise of stock options and the effect of restricted
stock when dilutive.
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