Circuit City 2005 Annual Report Download - page 49

and assumptions that affect the reported amount 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. Actual results could differ from those estimates.
Fiscal Year
— The Company’s fiscal year ends on December 31. The Company’s North American computer
business follows a fiscal year that ends on the last Saturday of the calendar year. Normally each fiscal year
consists of 52 weeks, but every five or six years, their fiscal year consists of 53 weeks, which was the case in
2005. The sales recorded in the additional week of 2005 represented less than one percent of the year’s sales.
Fiscal years 2004 and 2003 consisted of 52 weeks for this business.
Foreign Currency Translation
— The financial statements of the Company’s foreign entities are translated into
U.S. dollars, the reporting currency, using year-end exchange rates for balance sheet items and average exchange
rates for the statement of operations items. The translation differences are recorded as a separate component of
shareholders’ equity.
Cash and Cash Equivalents — The Company considers amounts held in money market accounts and other short-
term investments, including overnight bank deposits, with an original maturity date of three months or less to be
cash equivalents.
Inventories
— Inventories consist primarily of finished goods and are stated at the lower of cost or market value.
Cost is determined by using the first-in, first-out method. Allowances are maintained for obsolete, slow-moving
and non-saleable inventory.
Property, Plant and Equipment
– Property, plant and equipment is stated at cost. Depreciation of furniture,
fixtures and equipment, including equipment under capital leases, is on the straight-line or accelerated method
over their estimated useful lives ranging from three to ten years. Depreciation of buildings is on the straight-line
method over estimated useful lives of 30 to 50 years. Leasehold improvements are amortized over the lesser of
the useful lives or the term of the respective leases.
Capitalized Software Costs – The Company capitalizes purchased software ready for service and capitalizes
software development costs incurred on significant projects from the time that the preliminary project stage is
completed and management commits to funding a project until the project is substantially complete and the
software is ready for its intended use. Capitalized costs include materials and service costs and payroll and
payroll-related costs. Capitalized software costs are amortized using the straight-line method over the estimated
useful life of the underlying system, generally five years.
Goodwill –The cost in excess of fair value of net assets of businesses acquired is recorded in the consolidated
balance sheets as “Goodwill.” In accordance with Statement of Financial Accounting Standards (“SFAS”) No.
142, “Goodwill and Other Intangible Assets,” goodwill is no longer amortized, but is to be tested for impairment
annually or when facts and circumstances indicate goodwill may be impaired.
Evaluation of Long
-lived Assets – Long-lived assets are evaluated for recoverability in accordance with SFAS
144, “Accounting for the Impairment or Disposal of Long-lived Assets,” whenever events or changes in
circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the
Company estimates the future cash flows expected to result from the use of the asset and eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of
the asset is recognized.
Product Warranties
– Provisions for estimated future expenses relating to product warranties for the Company’s
assembled PCs are recorded as cost of sales when revenue is recognized. Liability estimates are determined based
on management judgment considering such factors as the number of units sold, historical and anticipated rates of
warranty claims and the likely current cost of corrective action.
Income Taxes
— Deferred tax assets and liabilities are recognized for the expected tax consequences of
temporary differences between financial reporting and tax bases of assets and liabilities and are measured using