Circuit City 2005 Annual Report Download - page 27

expenditures, and fund the payment of interest on outstanding debt. Our primary ongoing cash requirements will be to
finance working capital, fund the payment of principal and interest on indebtedness and fund capital expenditures. We
believe future cash flows from operations and availability of borrowings under our lines of credit will be sufficient to
fund ongoing cash requirements.
We are party to certain litigation, the outcome of which we believe, based on discussions with legal counsel, will
not have a material adverse effect on our consolidated financial statements.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of
raising capital, incurring debt or operating our business. We do not have any arrangements or relationships with entities
that are not consolidated into the financial statements that are reasonably likely to materially affect our liquidity or the
availability of capital resources.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 to the consolidated financial statements. The policies
below have been identified as critical to our business operations and understanding the results of operations. Certain
accounting policies require the application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty, and as a result, actual results could differ from those estimates. These judgments are based on historical
experience, observation of trends in the industry, information provided by customers and information available from
other outside sources, as appropriate. Management believes that full consideration has been given to all relevant
circumstances that we may be subject to, and the consolidated financial statements of the Company accurately reflect
management’
s best estimate of the consolidated results of operations, financial position and cash flows of the Company
for the years presented. Actual results may differ from these estimates under different conditions or assumptions.
Revenue Recognition.
We recognize product sales 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 of receipt by customers when title and risk of loss both are transferred. Sales are shown net of
returns and allowances, rebates and sales incentives. Reserves for estimated returns and allowances are provided when
sales are recorded, based on historical experience and current trends.
Accounts Receivable and Allowance for Doubtful Accounts.
We record an allowance for doubtful accounts to reflect
our estimate of the collectibility of our trade accounts receivable. We evaluate the collectibility of accounts receivable
based on a combination of factors, including an analysis of the age of customer accounts and our historical experience
with accounts receivable write-offs. The analysis also includes the financial condition of a specific customer or
industry, and general economic conditions. In circumstances where we are aware of customer charge-backs or a
specific customer’
s inability to meet its financial obligations, a specific reserve for bad debts applicable to amounts due
to reduce the net recognized receivable to the amount management reasonably believes will be collected is recorded. In
those situations with ongoing discussions, the amount of bad debt recognized is based on the status of the discussions.
While bad debt allowances have been within expectations and the provisions established, there can be no guarantee that
we will continue to experience the same allowance rate we have in the past.
Inventories.
We value our inventories at the lower of cost or market, cost being determined on the first-in, first-out
method. Reserves for excess and obsolete or unmarketable merchandise are provided based on historical experience,
assumptions about future product demand and market conditions. If market conditions are less favorable than projected
or if technological developments result in accelerated obsolescence, additional write-downs may be required. While
obsolescence and resultant markdowns have been within expectations, there can be no guarantee that we will continue
to experience the same level of markdowns we have in the past.
Long
-lived Assets. Management exercises judgment in evaluating our long-lived assets for impairment. We believe we
will generate sufficient undiscounted cash flow to more than recover the investments made in property, plant and
equipment. Our estimates of future cash flows involve assumptions concerning future operating performance and
economic conditions. While we believe that our estimates of future cash flows are reasonable, different assumptions