Callaway 2004 Annual Report Download - page 74

CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
EÅective Date of SFAS No. 133,'' SFAS No. 138, ""Accounting for Certain Derivative Instruments and
Certain Hedging Activities'' and SFAS No. 149, ""Amendment of SFAS No. 133 on Derivative Instruments
and Hedging Activities.'' The purpose of these derivative instruments is to minimize the variability of cash
Öows associated with the anticipated transactions being hedged. As changes in foreign currency rates impact
the United States dollar value of anticipated transactions, the fair value of the forward contracts also changes,
oÅsetting foreign currency rate Öuctuations. Changes in the fair value of derivatives are recorded each period
in income or other comprehensive income, depending on whether the derivatives are designated as hedges and,
if so, the types and eÅectiveness of hedges.
Additional information about the Company's use of derivative instruments is presented in Note 8.
Earnings Per Common Share
Basic earnings per common share is calculated by dividing net income for the period by the weighted-
average number of common shares outstanding during the period. Diluted earnings per common share is
calculated by dividing net income for the period by the sum of the weighted-average number of common
shares outstanding during the period, plus the number of potentially dilutive common shares (""dilutive
securities'') that were outstanding during the period. Dilutive securities include shares owned by the Callaway
Golf Company Grantor Stock Trust, options granted pursuant to the Company's stock option plans, potential
shares related to the Employee Stock Purchase Plan, rights to purchase preferred shares under the Callaway
Golf Company Shareholder Rights Plan and Restricted Stock grants to employees and non-employees
(Note 10). Dilutive securities related to the Callaway Golf Company Grantor Stock Trust and the Company's
stock option plans are included in the calculation of diluted earnings per common share using the treasury
stock method. Under the treasury stock method, the dilutive securities related to the Callaway Golf Company
Grantor Stock Trust do not have any impact upon the diluted earnings per common share. Dilutive securities
related to the Employee Stock Purchase Plan are calculated by dividing the average withholdings during the
period by 85% of the lower of the oÅering period price or the market value at the end of the period. The
dilutive eÅect of rights to purchase preferred shares under the Callaway Golf Shareholder Rights Plan have
not been included as dilutive securities because the conditions necessary to cause these rights to be exercisable
were not met. Potentially dilutive securities are excluded from the computation of earnings per share in
periods in which a net loss is reported, as their eÅect would be antidilutive. A reconciliation of the numerators
and denominators of the basic and diluted earnings per common share calculations for the years ended
December 31, 2004, 2003 and 2002 is presented in Note 9.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments purchased with original maturities of three months or less.
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 uncollectable 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. Inventories include material, labor and manufacturing overhead costs.
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