Callaway 2004 Annual Report Download - page 26

Management believes the following critical accounting policies aÅect its more signiÑcant estimates and
assumptions used in the preparation of its consolidated Ñnancial statements:
Revenue Recognition
Sales are recognized when both title and risk of loss transfer to the customer. Sales are recorded net of an
allowance for sales returns and sales programs. Sales returns are estimated based upon historical returns,
current economic trends, changes in customer demands and sell-through of products. The Company also
records estimated reductions to revenue for sales programs such as incentive oÅerings. Sales program accruals
are estimated based upon the attributes of the sales program, management's forecast of future product
demand, and historical customer participation in similar programs. If the actual costs of sales returns and sales
programs signiÑcantly exceed the recorded estimated allowance, the Company's sales would be signiÑcantly
adversely aÅected.
Allowance for Doubtful Accounts
The Company maintains an allowance for estimated losses resulting from the failure of its customers to
make required payments. An estimate of uncollectible amounts is made by management based upon historical
bad debts, current customer receivable balances, age of customer receivable balances, the customer's Ñnancial
condition and current economic trends, all of which are subject to change. If the actual uncollected amounts
signiÑcantly exceed the estimated allowance, the Company's operating results would be signiÑcantly adversely
aÅected.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the Ñrst-in, Ñrst-out
(FIFO) method. The inventory balance, which includes material, labor and manufacturing overhead costs, is
recorded net of an estimated allowance for obsolete or unmarketable inventory. The estimated allowance for
obsolete or unmarketable inventory is based upon management's understanding of market conditions and
forecasts of future product demand, all of which are subject to change. If the actual amount of obsolete or
unmarketable inventory signiÑcantly exceeds the estimated allowance, the Company's cost of sales, gross
proÑt and net income would be signiÑcantly adversely aÅected.
Long-Lived Assets
In the normal course of business, the Company acquires tangible and intangible assets. The Company
periodically evaluates the recoverability of the carrying amount of its long-lived assets (including property,
plant and equipment, goodwill and other intangible assets) whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. An impairment is assessed when
the undiscounted future cash Öows estimated to be derived from an asset are less than its carrying amount.
Impairments are recognized in operating earnings. The Company uses its best judgment based on the most
current facts and circumstances surrounding its business when applying these impairment rules to determine
the timing of the impairment test, the undiscounted cash Öows used to assess impairments, and the fair value
of a potentially impaired asset. Changes in assumptions used could have a signiÑcant impact on the
Company's assessment of recoverability.
Warranty
The Company has a stated two-year warranty policy for its golf clubs, although the Company's historical
practice has been to honor warranty claims well after the two-year stated warranty period. The Company's
policy is to accrue the estimated cost of satisfying future warranty claims at the time the sale is recorded. In
estimating its future warranty obligations, the Company considers various relevant factors, including the
Company's stated warranty policies and practices, the historical frequency of claims, and the cost to replace or
repair its products under warranty. If the number of actual warranty claims or the cost of satisfying warranty
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