Big Lots 2007 Annual Report Download - page 140

52
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
Cost of Sales
Cost of sales include the cost of merchandise, net of cash discounts and rebates (including related inbound
freight to our distribution centers, duties, and commissions), markdowns, and inventory shrinkage. We classify
warehousing and outbound distribution and transportation costs as selling and administrative expenses. Due
to this classification, our gross margin rates may not be comparable to those of other retailers that include
warehousing and outbound distribution and transportation costs in cost of sales.
Selling and Administrative Expenses
We include store expenses (such as payroll and occupancy costs), warehousing, distribution, outbound
transportation costs to our stores, advertising, purchasing, insurance, non-income taxes, and overhead costs in
selling and administrative expenses. Selling and administrative expense rates may not be comparable to those
of other retailers that include distribution and outbound transportation costs in cost of sales. Distribution and
outbound transportation costs included in selling and administrative expenses were $198.3 million, $222.1
million, and $223.8 million for 2007, 2006, and 2005, respectively.
Rent Expense
Rent expense is recognized over the term of the lease and is included in selling and administrative expenses. We
recognize minimum rent starting when possession of the property is taken from the landlord, which normally
includes a construction period prior to store opening. When a lease contains a predetermined fixed escalation
of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference
between the recognized rental expense and the amounts payable under the lease as deferred incentive rent. We
also receive tenant allowances, which are recorded in deferred incentive rent and are amortized as a reduction to
rent expense over the term of the lease.
Certain of our leases provide for contingent rents that are not measurable at the lease inception date. Contingent
rent includes rent based on a percentage of sales that are in excess of a predetermined level. Contingent rent is
excluded from minimum rent and is included in the determination of total rent expense when it is probable that
the expense has been incurred and the amount is reasonably estimable.
Advertising Expense
Advertising costs are expensed as incurred, consist primarily of print and television advertisements, and are
included in selling and administrative expenses. Advertising expenses were $104.1 million, $105.4 million, and
$103.2 million for 2007, 2006, and 2005, respectively.
Earnings per Share
Basic earnings per share is based on the weighted-average number of shares outstanding during each period.
Diluted earnings per share is based on the weighted-average number of shares outstanding during each period
and the additional dilutive effect of stock options and nonvested restricted stock awards, calculated using the
treasury stock method.
Store Pre-opening Costs
Pre-opening costs incurred during the construction periods for new store openings are expensed as incurred.