Circuit City 2006 Annual Report Download - page 35

Years ended December 31,
2006 2005 2004
---- ---- ----
Balance, beginning of year $1,316 $2,011 $2,642
Charged to expense 1,556 21 168
Deductions (1,811) (716) (799)
------ ------- ------
Balance, end of year $1,061 $1,316 $2,011
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.
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.
Accruals
-
Management makes estimates and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. These estimates are based upon various factors such as the number of units sold,
historical and anticipated results and data received from third party vendors. Actual results could differ from these
estimates. Our most significant estimates include those related to the costs of vendor drop shipments, sales returns and
allowances, cooperative advertising and customer rebate reserves, and other vendor and employee related costs.
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. The changes in accrue product warranties were as follows:
Income Taxes
—
Deferred tax assets and liabilities are recognized for the effect of temporary differences between the
book and tax bases of recorded assets and liabilities and for tax loss carry forwards. The realization of net deferred tax
assets is dependent upon our ability to generate sufficient future taxable income. Where it is more likely than not that
some portion or all of the deferred tax asset will not be realized, we have provided a valuation allowance. If the
realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax
assets would increase net income in the period such determination is made.
Revenue Recognition and Accounts Receivable
–
The Company recognizes sales of products, including shipping
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.