Big Lots 2009 Annual Report Download - page 162

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
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 30, 2010 or January 31, 2009.
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 the discussion below under the caption “Selling and
Administrative Expenses” for additional information regarding 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 are 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
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.