Aarons 2005 Annual Report Download - page 30

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Notes to Consolidated Financial Statements
Note A: Summary of Significant
Accounting Policies
As of December 31, 2005 and 2004, and for the
Years Ended December 31, 2005, 2004 and 2003.
BASIS OF PRESENTATION —The consolidated financial
statements include the accounts of Aaron Rents, Inc. and its
wholly owned subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminated.
The preparation of the Company’s consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported
in these financial statements and accompanying notes. Actual
results could differ from those estimates. Generally, actual
experience has been consistent with management’sprior
estimates and assumptions. Management does not believe
these estimates or assumptions will change significantly in
the future absent unsurfaced or unforeseen events.
On July 12, 2004, the Company announced a 3-for-2 stock
split effected in the form of a 50% stock dividend on both
Common Stock and Class A Common Stock. New shares were
distributed on August 16, 2004 to shareholders of record as
of the close of business on August 2, 2004. All shareand per
shareinformation has been restated for all periods presented
to reflect this stock dividend.
On July 21, 2003, the Company announced a 3-for-2 stock
split effected in the form of a 50% stock dividend on both
Common Stock and Class A Common Stock. New shares were
distributed on August 15, 2003 to shareholders of recordas
of the close of business on August 1, 2003. All share and per
share information has been restated for all periods presented
to reflect this stock dividend.
LINE OF BUSINESS — The Company is engaged in the
business of renting and selling residential and office furniture,
consumer electronics, appliances, computers, and other mer-
chandise throughout the U.S., Puerto Rico, and Canada. The
Company manufactures furniture principally for its corporate
furnishings and sales and lease ownership operations.
CASH — In balance sheet and statement of cash flow pre-
sentations prior to December 31, 2004, checks outstanding
wereclassified as a reduction to cash. Since the financial
institutions with checks outstanding and those with deposits
on hand did not and do not have legal right of offset, we have
reclassified checks outstanding in certain zero balance bank
accounts to accounts payable for all consolidated balance
sheets and consolidated statements of cash flows presented.
This reclassification had the effect of increasing both cash
and accounts payable and accrued expenses by $4.6 million
and $3.8 million for the years ended December 31, 2003
and 2002, respectively.
Certain transactions previously reflected as a reduction
of book value of rental merchandise sold or disposed in the
accompanying consolidated statement of cash flows for the
years ended December 31, 2003 are reflected as an addition
to rental merchandise for the year ended December 31, 2004.
These transactions were reclassified in the accompanying
consolidated statements of cash flows resulting in increases
in both additions to rental merchandise and book value of
rental merchandise sold or disposed of $10.6 million for the
year ended December 31, 2003.
RENTAL MERCHANDISE — The Company’s rental mer-
chandise consists primarily of residential and office furniture,
consumer electronics, appliances, computers, and other mer-
chandise and is recorded at cost. The sales and lease ownership
division depreciates merchandise over the rental agreement
period, generally 12 to 24 months when on rent and 36
months when not on rent, to a 0% salvage value. The cor-
porate furnishings division depreciates merchandise over its
estimated useful life, which ranges from six months to 60
months, net of its salvage value, which ranges from 0% to
60% of historical cost. The Company’s policies require weekly
rental merchandise counts by store managers, which include
write-offs for unsalable, damaged, or missing merchandise
inventories. Full physical inventories are generally taken at the
fulfillment and manufacturing facilities on a quarterly basis,
and appropriate provisions are made for missing, damaged and
unsalable merchandise. In addition, the Company monitors
rental merchandise levels and mix by division, store, and fulfill-
ment center,as well as the average age of merchandise on hand.
If unsalable rental merchandise cannot be returned to vendors,
it is adjusted to its net realizable value or written off.
All rental merchandise is available for rental or sale. On
amonthly basis, all damaged, lost or unsalable merchandise
identified is written off. Effective September 30, 2004, the
Company began recording rental merchandise adjustments on
the allowance method. In connection with the adoption of this
method, a one-time adjustment of $2.5 million was recorded
to establish a rental merchandise allowance reserve. Rental
merchandise adjustments in the futureunder this new method
are expected to be materially consistent with the prior year’s
adjustments under the direct-write offmethod. Rental mer-
chandise write-offs, including the effect of the establishment
of the reserve mentioned above, totaled $22.9 million, $18.0
million, and $11.9 million during the years ended December
31, 2005, 2004, and 2003, respectively, and are included
in operating expenses in the accompanying consolidated
statements of earnings.
PROPERTY, PLANT AND EQUIPMENT— The Company
records property, plant, and equipment at cost. Depreciation
and amortization are computed on a straight-line basis over
the estimated useful lives of the respective assets, which are
from 8 to 40 years for buildings and improvements and from
one to five years for other depreciable property and equipment.
Gains and losses related to dispositions and retirements are
recognized as incurred. Maintenance and repairs are also
expensed as incurred; renewals and betterments are capitalized.
Depreciation expense, included in operating expenses in the
accompanying consolidated statements of earnings, for plant,
property, and equipment was $25.6 million, $22.2 million, and
$19.2 million during the years ended December 31, 2005,
2004, and 2003, respectively.
GOODWILL AND OTHER INTANGIBLES — Goodwill
represents the excess of the purchase price paid over the fair
value of the net assets acquired in connection with business
acquisitions. The Company accounts for goodwill and other
intangible assets in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible