Cabela's 2012 Annual Report Download - page 77

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Critical Accounting Policies and Use of Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America which requires management to make estimates and judgments that
affect amounts reported in the consolidated financial statements and accompanying notes. Management has
discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit
Committee of Cabela’s Board of Directors. While our estimates and assumptions are based on our knowledge of
current events and actions we may undertake in the future, actual results may ultimately differ from our estimates
and assumptions. Our estimation processes contain uncertainties because they require management to make
assumptions and apply judgment to make these estimates. Should actual results be different than our estimates, we
could be exposed to gains or losses from differences that may be material.
For a summary of our significant accounting policies, please refer to Note 1 of our consolidated financial
statements. We believe the accounting policies discussed below represent accounting policies we apply that are the
most critical to understanding our consolidated financial statements.
Merchandise Revenue Recognition
Revenue is recognized on our Direct sales when merchandise is delivered to the customer at the point of
delivery, with the point of delivery based on our estimate of shipping time from our distribution centers to the
customer. We recognize reserves for estimated product returns based upon our historical return experience and
expectations. Had our estimate of merchandise in-transit to customers and our estimate of product returns been
different by 10% at the end of 2012, our operating income would have been higher or lower by approximately
$0.7 million. Sales of gift instruments are recorded in merchandise revenue when the gift instruments are
redeemed in exchange for merchandise or services and as a liability prior to redemption. We recognize breakage
on gift instruments as revenue when the probability of redemption is remote. Had our estimate of breakage on
our recorded liability for gift instruments been different by 10% of the recorded liability at the end of 2012, our
merchandise revenue would have been higher or lower by approximately $0.7 million.
Inventories
We estimate provisions for inventory shrinkage, damaged goods returned values, and obsolete and slow-
moving items based on historical loss and product performance statistics and future merchandising objectives. Had
our estimated inventory reserves been different by 10% at the end of 2012, our cost of sales would have been higher
or lower by approximately $1.2 million.
Allowance for Loan Losses on Credit Cards
The allowance for loan losses represents management’s estimate of probable losses inherent in the credit card
loan portfolio. The allowance for loan losses is established through a charge to the provision for loan losses and is
regularly evaluated by management for adequacy. Loans on a payment plan or non-accrual are segmented from the
rest of the credit card loan portfolio into a restructured credit card loan segment before establishing an allowance
for loan losses as these loans have a higher probability of loss. Management estimates losses inherent in the credit
card loans segment and restructured credit card loans segment based on a model which tracks historical loss
experience on delinquent accounts, bankruptcies, death, and charge-offs, net of estimated recoveries. The Financial
Services segment uses a migration analysis and historical bankruptcy and death rates to estimate the likelihood that
a credit card loan will progress through the various stages of delinquency and to charge-off. This analysis estimates
the gross amount of principal that will be charged off over the next 12 months, net of recoveries. This estimate is
used to derive an estimated allowance for loan losses. In addition to these methods of measurement, management
also considers other factors such as general economic and business conditions affecting key lending areas, credit
concentration, changes in origination and portfolio management, and credit quality trends. Since the evaluation
of the inherent loss with respect to these factors is subject to a high degree of uncertainty, the measurement of
the overall allowance is subject to estimation risk, and the amount of actual losses can vary significantly from the