Big Lots 2008 Annual Report Download - page 114

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
occur when the amount of outstanding checks exceed the cash deposited at a given bank. We reclassify book
overdrafts, if any, to accounts payable on our consolidated balance sheets. Amounts due from banks for credit
and debit card transactions are typically settled in less than seven days. Amounts due from banks for these
transactions totaled $21.5 million and $21.9 million at January 31, 2009 and February 2, 2008, respectively.
Cash equivalents are stated at cost, which approximates market value.
Investments
Investment securities are classified as available-for-sale, held-to-maturity, or trading at the date of purchase.
Investments are recorded at fair value as either current assets or non-current assets based on the stated maturity
or our plans to either hold or sell the investment. Unrealized holding gains and losses on trading securities are
recognized in earnings. Unrealized holding gains and losses on available-for-sale securities are recognized in
other comprehensive income, until realized. We did not own any held-to-maturity or available-for-sale securities
as of January 31, 2009 or February 2, 2008.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the average cost retail inventory method.
Cost includes any applicable inbound shipping and handling costs associated with the receipt of merchandise into
our distribution centers (See Selling and Administrative Expenses below for a discussion of outbound shipping and
handling costs to our stores). Market is determined based on the estimated net realizable value, which generally
is the merchandise selling price. Under the average cost retail inventory method, inventory is segregated into
departments of merchandise having similar characteristics at its current retail selling value. Current retail selling
values are converted to a cost basis by applying an average cost factor to each specific merchandise department’s
retail selling value. Cost factors represent the average cost-to-retail ratio computed using beginning inventory and
all fiscal year-to-date purchase activity specific to each merchandise department.
Under the average cost retail inventory method, permanent sales price markdowns result in cost reductions in
inventory. Our permanent sales price markdowns are typically related to end of season clearance events and are
recorded as a charge to cost of sales in the period of management’s decision to initiate sales price reductions with
the intent not to return the price to regular retail. Promotional markdowns were recorded as a charge to net sales in
the period the merchandise is sold. Promotional markdowns are typically related to specific marketing efforts with
respect to products maintained continuously in our stores or products that are only available in limited quantities
but represent substantial value to our customers. Promotional markdowns are principally used to drive higher sales
volume during a defined promotional period.
We record a reduction to inventories and charge to cost of sales for a shrinkage inventory allowance. The shrinkage
allowance is calculated as a percentage of sales for the period from the last physical inventory date to the end of
the reporting period. Such estimates are based on our historical and current year experience based on a sample of
recent physical inventory results.
We record a reduction to inventories and charge to cost of sales for an excess or obsolete inventory allowance.
The excess or obsolete inventory allowance is estimated based on a review of our aged inventory and takes into
account any items that have already received a cost reduction as a result of the permanent markdown process
discussed above. We estimate an allowance for excess or obsolete inventory based on historical sales trends, age
and quantity of product on hand, and anticipated future sales.
Payments Received from Vendors
Payments received from vendors relate primarily to rebates and reimbursement for markdowns and are
recognized in our consolidated statements of operations as a reduction to cost of inventory purchases in the
period that the rebate or reimbursement is earned or realized and, consequently, result in a reduction in cost of
sales when the related inventory is sold.
Note 1 — Summary of Significant Accounting Policies (Continued)