Callaway 2006 Annual Report Download - page 75

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company
Callaway Golf Company (“Callaway Golf” or the “Company”), a Delaware corporation, together with its
subsidiaries, designs, manufactures and sells high quality golf clubs (drivers, fairway woods, hybrids, irons,
wedges and putters) and golf balls. The Company also sells golf accessories such as footwear, golf bags, golf
gloves, golf headwear, golf towels and golf umbrellas. The Company generally sells its products to golf retailers
(including pro shops at golf courses and off course retailers), sporting goods retailers and mass merchants,
directly and through its wholly owned subsidiaries, and to third party distributors in the United States and in over
100 countries around the world. The Company also sells pre-owned Callaway Golf products through its website,
www.callawaygolfpreowned.com. In addition, the Company licenses its name for apparel, watches, travel gear,
eyewear and other golf accessories.
Note 2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Callaway Golf Company and
its domestic and foreign subsidiaries. All material intercompany transactions and balances have been eliminated
in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States (“GAAP”) requires management to make estimates and judgments that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates
on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances. Examples of such estimates include provisions for warranty, uncollectible accounts receivable,
inventory obsolescence, sales returns, tax contingencies, market value estimates of derivative instruments and
recoverability of long-lived assets. Actual results may materially differ from these estimates. On an ongoing
basis, the Company reviews its estimates to ensure that these estimates appropriately reflect changes in its
business or as new information becomes available.
Revenue Recognition
Sales are recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in
Financial Statements,” as products are shipped to customers, net of an allowance for sales returns and sales
programs. The criteria for recognition of revenue is when persuasive evidence that an arrangement exists and
both title and risk of loss have passed to the customer, the price is fixed or determinable and collectability is
reasonably assured. 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 offerings. 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.
Amounts billed to customers for shipping and handling are included in net sales and costs incurred related to
shipping and handling are included in cost of sales.
Royalty income is recorded as underlying product sales occur, subject to certain minimums, in accordance
with the related licensing arrangements (see Note 17). Royalty income for 2006, 2005 and 2004 was $8,292,000,
$7,080,000 and $4,132,000, respectively.
F-7