Sears 2010 Annual Report Download - page 54

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
We classify cash balances which have been pledged as collateral, and for which we do not have the ability
to substitute letters of credit, as restricted cash on our consolidated balance sheet.
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 $122 million and $116 million at January 29, 2011
and January 30, 2010, 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 $36 million and
$39 million at January 29, 2011 and January 30, 2010, respectively. Our accounts receivable balance on our
consolidated balance sheet is presented net of our allowance for doubtful accounts and 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 the RIM provides an inventory valuation that reasonably
approximates cost and results in carrying inventory at the lower of cost or market.
Approximately 48% of consolidated merchandise inventories are valued using LIFO. To estimate the effects
of inflation on inventories, we utilize external price indices determined by an outside source, the Bureau of Labor
Statistics. If the FIFO method of inventory valuation had been used instead of the LIFO method, merchandise
inventories would have been $42 million higher at January 29, 2011 and $27 million higher at January 30, 2010.
Vendor Rebates and Allowances
We receive rebates and allowances from certain vendors through a variety of programs and arrangements
intended to offset our costs of promoting and selling certain vendor products. These vendor payments are
recognized and recorded as a reduction to the cost of merchandise inventories when earned and, thereafter, as a
reduction of cost of sales, buying and occupancy as the merchandise is sold. Up-front consideration received
from vendors linked to purchases or other commitments is initially deferred and amortized ratably to cost of
sales, buying and occupancy over the life of the contract or as performance of the activities specified by the
vendor to earn the fee is completed.
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