Sears 2014 Annual Report Download - page 71

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
71
and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during
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 and accounts receivable valuation, estimating depreciation, amortization and recoverability of long-lived
assets, establishing self-insurance, warranty, legal and other reserves, performing goodwill, intangible and long-lived
asset impairment analyses, and in establishing valuation allowances on deferred income tax assets and reserves for
tax examination exposures, and calculating retirement benefits.
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 deposits in-transit from banks for payments related to third-party credit card and
debit card transactions within cash equivalents. The deposits in-transit balances included within cash equivalents
were $105 million and $144 million at January 31, 2015 and February 1, 2014, respectively.
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 $85 million and $97 million at January 31, 2015 and
February 1, 2014, 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 $25 million and $32
million at January 31, 2015 and February 1, 2014, 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 50% 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 $43 million higher at January 31, 2015 and $70 million higher at February 1, 2014.
During 2014 and 2013, a reduction in inventory quantities resulted in a liquidation of applicable LIFO inventory