Big Lots 2010 Annual Report Download - page 123

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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 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
Selling and administrative expenses include store expenses (such as payroll and occupancy costs) and costs
related to warehousing, distribution, outbound transportation to our stores, advertising, purchasing, insurance,
non-income taxes, and overhead. Selling and administrative expense rates may not be comparable to those
of other retailers that include warehousing, distribution, and outbound transportation costs in cost of sales.
Distribution and outbound transportation costs included in selling and administrative expenses were $154.3
million, $158.4 million, and $181.2 million for 2010, 2009, and 2008, 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 or set-up 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, common area maintenance
(“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, which are expensed as incurred, consist primarily of print, television, internet, and in-store
point-of-purchase materials, and are included in selling and administrative expenses. Advertising expenses were
$92.0 million, $96.2 million, and $102.3 million for 2010, 2009, and 2008, respectively.
Store Pre-opening Costs
Pre-opening costs incurred during the construction periods for new store openings are expensed as incurred.