Sunbeam 2004 Annual Report Download - page 32

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cont’d)
both tax and accounting purposes. Gains and losses related to the effective portion of the interest rate
swap will be reported as a component of other comprehensive income and will be reclassified into
earnings in the same period that the hedged transaction affects earnings.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted
in the United States, which require us to make judgments, estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. The following list of critical
accounting policies is not intended to be a comprehensive list of all our accounting policies. Our
significant accounting policies are more fully described in Note 1., Significant Accounting Policies to
Item 8., Financial Statements and Supplementary Data. The following represents a summary of our
critical accounting policies, defined as those policies that we believe are the most important to the
portrayal of our financial condition and results of operations, and/or require management’s significant
judgments and estimates:
Revenue recognition and allowances for product returns
We recognize revenue when title transfers. In most cases, title transfers at the time product is
shipped to customers. We allow customers to return defective or damaged products as well as certain
other products for credit, replacement, or exchange. Our revenue is recognized as the net amount to be
received after deducting estimated amounts for product returns, discounts, and allowances. We estimate
future product returns based upon historical return rates and our judgment. If these estimates do not
properly reflect future returns, they could be revised.
Allowance for accounts receivable
We maintain an allowance for doubtful accounts for estimated losses that may result from the
inability of our customers to make required payments. That estimate is based on historical collection
experience, current economic and market conditions, and a review of the current status of each
customer’s trade accounts receivable. If the financial condition of our customers were to deteriorate or
our judgment regarding their financial condition was to change negatively, additional allowances may be
required resulting in a charge to income in the period such determination was made. Conversely, if the
financial condition of our customers were to improve or our judgment regarding their financial
condition was to change positively, a reduction in the allowances may be required resulting in an
increase in income in the period such determination was made.
Allowance for inventory obsolescence
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of the inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less favorable than those
projected by us, additional inventory write-downs may be required resulting in a charge to income in the
period such determination was made. Conversely, if actual market conditions are more favorable than
those projected by us, a reduction in the write down may be required resulting in an increase in income
in the period such determination was made.
Deferred tax assets
We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is
more likely than not to be realized. While we have considered future taxable income and ongoing
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