Circuit City 2004 Annual Report Download - page 44

Years ended December 31,
2004 2003 2002
---- ---- ----
Balance, beginning of year $10,000 $11,275 $11,120
Charged to expense 5,079 3,906 4,581
Deductions (3,761) (5,181) (4,426)
------ ------ ------
Balance, end of year $11,318 $10,000 $11,275
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revenue, when persuasive evidence of an order arrangement exists, delivery has occurred, the sales price is fixed
or determinable and collectibility is reasonably assured. Generally, these criteria are met at the time the product is
received by the customers when title and risk of loss have transferred. Allowances for estimated subsequent
customer returns, rebates and sales incentives are provided when revenues are recorded. Costs incurred for the
shipping and handling of its products are recorded as cost of sales. Revenue from extended warranty and support
contracts on the Company's assembled PCs is deferred and recognized over the contract period.
The Company recognizes revenue for its software sales in accordance with Emerging Issues Task Force ("EITF")
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables". Hosting and service revenues are
recognized on a monthly basis over the terms of the contracts. Professional services and other revenues, when
sold with hosting services, are recognized as the services are rendered when the services have value to the
customer on a stand-alone basis and there is objective evidence of fair value of each deliverable. If an
arrangement does not qualify for separate accounting, the revenues are recognized over the term of the hosting
agreement.
Accounts receivable are shown in the consolidated balance sheets net of allowances for doubtful collections and
subsequent customer returns. The changes in these allowance accounts are summarized as follows (in thousands):
Advertising Costs
- Advertising costs, consisting primarily of catalog preparation, printing and postage
expenditures are amortized over the period of catalog distribution, generally one to six months, during which the
benefits are expected. Advertising expenditures relating to the Company's national advertising campaign and
other television advertising costs are expensed in the period the advertising takes place.
Advertising costs, net of rebates from vendors, of $43.8 million in 2004, $43.7 million in 2003 and $44.1 million
in 2002 are included in the accompanying Consolidated Statements of Operations. Effective January 1, 2003 the
Company adopted EITF Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that consideration received from vendors, such as
advertising support funds, be accounted for as a reduction of cost of sales unless certain conditions are met
showing that the funds are used for a specific program entirely funded by an individual vendor. If these specific
requirements related to individual vendors are met, the consideration is accounted for as a reduction in the related
expense category, such as advertising expense. EITF 02-16 applies to all agreements modified or entered into on
or after January 1, 2003. The Company utilizes advertising programs to support vendors, including catalogs,
internet and magazine advertising, and receives payments and credits from vendors, including consideration
pursuant to volume incentive programs and cooperative marketing programs. As a result of prospectively
adopting EITF 02-16, the Company has recorded $19.2 million for the year ended December 31, 2004 and $14.5
million for the year ended December 31, 2003 of vendor consideration as a reduction of cost of sales. Adopting
EITF 02-16 had no impact on income (loss) from operations, as the vendor consideration recorded as a reduction
of cost of sales would previously have been recorded as a reduction of advertising expense.
Prepaid expenses at December 31, 2004 and 2003 include deferred advertising costs of $5.6 million and $4.2
million, respectively, which are reflected as an expense during the periods benefited, typically the subsequent
fiscal quarter.
Research and Development Costs
- Costs incurred in connection with research and development are expensed as