Big Lots 2012 Annual Report Download - page 128

48
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1 — Basis of Presentation and Summary of Significant Accounting Policies (Continued)
Restricted Cash
Our restricted cash served as collateral, in place of an irrevocable stand-by letter of credit, to provide financial
assurance that we would fulfill our obligations with respect to cash requirements associated with self-insurance,
as discussed in note 10. The cash was on deposit with our insurance carrier.
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 February 2, 2013 and January 28, 2012.
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 classes 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 class’ 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 class.
Under our previous inventory management system which was used through the end of 2011, we calculated
average cost at the department level which constituted 50 inventory cost pools. On January 29, 2012, the first
day of 2012, we completed the implementation of our new inventory management systems, which has allowed
us to more precisely determine our inventory cost under the average cost retail inventory method. We now
calculate average cost at the class level which constitutes approximately 350 inventory cost pools.
This change in accounting principle, to include approximately 350 class inventory cost pools in the retail
method calculation instead of approximately 50 departments in the calculation’s inventory cost pools, is
preferable as it provides us with a more precise estimate of the average cost of our merchandise inventories.
Accounting Standards Codification (“ASC”) 250, “Accounting Changes and Error Corrections” requires
that unless it is impracticable to do so, the voluntary adoption of a new accounting principle should be done
retrospectively. Prior to January 29, 2012, the date we completed our implementation of SAP® for Retail,
our accounting systems did not capture merchandise inventory costs with class level detail needed for us to
recognize, measure and disclose amounts for prior periods under the retrospective application. In particular, the
previous inventory system did not track or reconcile stock ledger information by class, but rather by department.
Specifically, key items such as freight and shrink costs were aggregated at the department level, with no data
identifier to the class, which made it impractical to retrospectively account for the change. Therefore, we have
adopted this change in accounting principle prospectively from the beginning of the current year, as we can
determine the cumulative effect in inventory cost as of that date.
As the impact of the accounting change in the beginning of the current year inventory is immaterial, we have
recognized the cumulative effect of the change in accounting principle as a current year expense by recording a
reduction in inventory and a corresponding increase to cost of sales of approximately $5.6 million in the first quarter
of 2012. This non-cash charge reduced the 2012 income from continuing operations and net income by approximately
$3.4 million and reduced 2012 basic and diluted earnings per share from continuing operations by $0.06.