Whole Foods 2009 Annual Report Download - page 39

33
Statements, “Long-Term Debt,” in “Item 8. Financial Statements and Supplementary Data.” We have no other off-balance
sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our consolidated
financial statements or financial condition.
Critical Accounting Policies
The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of
contingent assets and liabilities. Actual amounts may differ from these estimates. We base our estimates on historical
experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. On an
ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make
adjustments we consider appropriate under the facts and circumstances.
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and
financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are
summarized in Note 2 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data.”
We believe that the following accounting policies are the most critical in the preparation of our financial statements because
they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.
Inventory Valuation
We value our inventories at the lower of cost or market. Cost was determined using the last-in, first-out (“LIFO”) method for
approximately 93.6% and 94.0% of inventories at September 27, 2009 and September 28, 2008, respectively. Under the
LIFO method, the cost assigned to items sold is based on the cost of the most recent items purchased. As a result, the costs of
the first items purchased remain in inventory and are used to value ending inventory. The excess of estimated current costs
over LIFO carrying value, or LIFO reserve, was approximately $27.1 million and $32.7 million at September 27, 2009 and
September 28, 2008, respectively. Costs for remaining inventories are determined by the first-in, first-out (“FIFO”) method.
Cost was determined using the retail method and the item cost method for inventories in fiscal years 2009 and 2008. Under
the retail method, the valuation of inventories at cost and the resulting gross margins are determined by counting each item in
inventory, then applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent
in the retail inventory method calculations are certain management judgments and estimates which could impact the ending
inventory valuation at cost as well as the resulting gross margins. The item cost method involves counting each item in
inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances) of each item
and recording the actual cost of items sold. The item cost method of accounting enables management to more precisely
manage inventory and purchasing levels when compared to the retail method of accounting.
Our cost-to-retail ratios contain uncertainties because the calculation requires management to make assumptions and to apply
judgment regarding inventory mix, inventory spoilage and inventory shrink. Because of the significance of the judgments
and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or
if the underlying circumstances were to change. A 10% difference in our cost-to-retail ratios at September 27, 2009, would
have affected net income by approximately $3.3 million for fiscal year 2009.
Goodwill and Intangible Assets
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed. Goodwill is reviewed for impairment annually at the beginning of the Company’s fourth
fiscal quarter, or more frequently if impairment indicators arise, on a reporting unit level. We allocate goodwill to one
reporting unit for goodwill impairment testing. We determine fair value utilizing both a market value method and discounted
projected future cash flows compared to our carrying value for the purpose of identifying impairment. Our annual
impairment review requires extensive use of accounting judgment and financial estimates. Application of alternative
assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce
significantly different results. Because of the significance of the judgments and estimation processes, it is likely that
materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to
change.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to
sell. Application of alternative assumptions, such as changes in estimate of future cash flows, could produce significantly
different results. Because of the significance of the judgments and estimation processes, it is likely that materially different
amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.