CDW 2012 Annual Report Download - page 46

Table of Contents
arrangements, Infrastructure as a Service arrangements, and data center services, including internet connectivity, web hosting, server co-location
and managed services, is recognized over the period service is provided.
We also sell certain products for which we act as an agent. Products in this category include the sale of third-party services, warranties,
software assurance (“SA”) or third-party hosted Software as a Service and Infrastructure as a Service arrangements. SA is a product that allows
customers to upgrade, at no additional cost, to the latest technology if new applications are introduced during the period that the SA is in effect.
These sales do not meet the criteria for gross sales recognition, and thus are recognized on a net basis at the time of sale. Under net sales
recognition, the cost paid to the vendor or third-party service provider is recorded as a reduction to sales, resulting in net sales being equal to the
gross profit on the transaction.
Our larger customers are offered the opportunity by certain of our vendors to purchase software licenses and SA under enterprise
agreements (“EAs”). Under EAs, customers are considered to be compliant with applicable license requirements for the ensuing year, regardless
of changes to their employee base. Customers are charged an annual true-up fee for changes in the number of users over the year. With most
EAs, our vendors will transfer the license and bill the customer directly, paying resellers such as us an agency fee or commission on these sales.
We record these fees as a component of net sales as earned and there is no corresponding cost of sales amount. In certain instances, we bill the
customer directly under an EA and account for the individual items sold based on the nature of the item. Our vendors typically dictate how the
EA will be sold to the customer.
From time to time, we sell some of our products and services as part of bundled contract arrangements containing multiple deliverables,
which may include a combination of the products and services. For each deliverable that represents a separate unit of accounting, revenue is
allocated based upon the relative selling prices of each element as determined by our selling price for the deliverable when it is sold on a stand-
alone basis.
We record freight billed to our customers as net sales and the related freight costs as a cost of sales.
Deferred revenue includes (1) payments received from customers in advance of providing the product or performing services, and (2)
amounts deferred if other conditions of revenue recognition have not been met.
We perform an analysis of the estimated number of days of sales in-transit to customers at the end of each period based on a weighted-
average analysis of commercial delivery terms that includes drop-shipment arrangements. This analysis is the basis upon which we estimate the
amount of sales in-
transit at the end of the period and adjust revenue and the related costs to reflect only what has been received by the customer.
Changes in delivery patterns may result in a different number of business days used in making this adjustment and could have a material impact
on our revenue recognition for the period.
Inventory Valuation
Inventory is valued at the lower of cost or market value. Cost is determined using a weighted-average cost method. Price protection is
recorded when earned as a reduction to the cost of inventory. We decrease the value of inventory for estimated obsolescence equal to the
difference between the cost of inventory and the estimated market value, based upon an aging analysis of the inventory on hand, specifically
known inventory-related risks, and assumptions about future demand and market conditions. If future demand or actual market conditions are
less favorable than those projected by management, additional inventory write-downs may be required.
Vendor Programs
We receive incentives from certain of our vendors related to cooperative advertising allowances, volume rebates, bid programs, price
protection and other programs. These incentives generally relate to written agreements with specified performance requirements with the
vendors and are recorded as adjustments to cost of sales or inventory, depending on the nature of the incentive. Vendors may change the terms of
some or all of these programs, which could have an impact on our results of operations.
We record receivables from vendors related to these programs when the amounts are probable and reasonably estimable. Some
programs are based on the achievement of specific targets, and we base our estimates on information provided by our vendors and internal
information to assess our progress toward achieving those targets. If actual performance does not match our estimates, we may be required to
adjust our receivables. We record reserves for vendor receivables for estimated losses due to vendors’
inability to pay or rejections by vendors of
claims; however, if actual collections differ from our estimates, we may incur additional losses that could have a material impact on gross
margin and operating income.
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