Big Lots 2009 Annual Report Download - page 168

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 — Summary of Significant Accounting Policies (Continued)
unredeemed gift card and merchandise credit balances that had aged at least four years beyond the end of their
original issuance month. The liability for the unredeemed cash value of gift cards and merchandise credits is
recorded in accrued operating expenses.
We offer price hold contracts on merchandise. Revenue for price hold contracts is recognized when the customer
makes the final payment and takes possession of the merchandise. Amounts paid by customers under price hold
contracts are recorded in accrued operating expenses until a sale is consummated.
Cost of Sales
Cost of sales includes the cost of merchandise, net of cash discounts and rebates, markdowns, and inventory
shrinkage. Cost of merchandise includes related inbound freight to our distribution centers, duties, and
commissions. 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 $158.4 million,
$181.2 million, and $198.3 million for 2009, 2008, and 2007, 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.
Our leases generally obligate us for our applicable portion of real estate taxes, CAM, and property insurance
that has been incurred by the landlord with respect to the leased property. We maintain accruals for our
estimated applicable portion of real estate taxes, CAM, and property insurance incurred but not settled at each
reporting date. We estimate these accruals based on historical payments made and take into account any known
trends. Inherent in these estimates is the risk that actual costs incurred by landlords and the resulting payments
by us may be higher or lower than the amounts we have recorded on our books.
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 $96.2 million, $102.3 million, and
$104.1 million for 2009, 2008, and 2007, respectively.