Whole Foods 2011 Annual Report Download - page 44

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Accounts Receivable
Accounts receivable are shown net of related allowances and consist primarily of credit card receivables, occupancy-related
receivables, customer purchases and vendor receivables. Vendor receivable balances are generally presented on a gross basis
separate from any related payable due. Allowance for doubtful accounts is calculated based on historical experience,
customer credit risk and application of the specific identification method and totaled approximately $2.2 million in both
fiscal year 2011 and 2010.
Inventories
The Company values inventories at the lower of cost or market. Cost was determined using the last-in, first-out (“LIFO”)
method for approximately 92.3% and 93.9% of inventories in fiscal years 2011 and 2010, 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 $29.7 million and $19.4 million at September 25, 2011 and
September 26, 2010, respectively. Costs for remaining inventories are determined by the first-in, first-out (“FIFO”) method.
Cost is determined using the item cost method and the retail method for inventories. The item cost method involves counting
each item in inventory, assigning costs to each of these items based on the actual purchase cost (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. 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.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. The Company provides
depreciation of equipment over the estimated useful lives (generally 3 to 15 years) using the straight-line method, and
provides amortization of leasehold improvements and real estate assets under capital leases on a straight-line basis over the
shorter of the estimated useful lives of the improvements or the terms of the related leases. Terms of leases used in the
determination of estimated useful lives may include renewal periods at the Company’ s option if exercise of the option is
determined to be reasonably assured. The Company provides depreciation of buildings over the estimated useful lives
(generally 20 to 30 years) using the straight-line method. Costs related to a projected site determined to be unsatisfactory and
general site selection costs that cannot be identified with a specific store location are charged to operations currently. The
Company recognizes a liability for the fair value of a conditional asset retirement obligation when the obligation is incurred.
Repair and maintenance costs are expensed as incurred. Interest costs on significant projects constructed or developed for the
Company’ s own use are capitalized as a separate component of the asset. Upon retirement or disposal of assets, the cost and
related accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in earnings.
Operating Leases
The Company leases stores, non-retail facilities and administrative offices under operating leases. Store lease agreements
generally include rent holidays, rent escalation clauses and contingent rent provisions for percentage of sales in excess of
specified levels. Most of our lease agreements include renewal periods at the Company’ s option. We recognize rent holiday
periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company takes
possession of the leased space for construction and other purposes. We record tenant improvement allowances and rent
holidays as deferred rent liabilities, and amortize the deferred rent over the terms of the lease to rent. We record rent
liabilities for contingent percentage of sales lease provisions when we determine that it is probable that the specified levels as
defined by the lease will be reached.
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 during 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. In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2011-08, “Testing Goodwill for Impairment,” which amends Accounting Standards
Codification (“ASC”) 350, “Intangibles – Goodwill and Other.” The amended guidance simplifies how entities test for
goodwill impairment. The amendments permit an entity to first assess the qualitative factors to determine whether it is more
likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining if performing
the two-step goodwill impairment test is necessary. The amendments are effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011. The Company elected to early adopt this
update effective for its impairment test for the fiscal year ended September 25, 2011.