Circuit City 2006 Annual Report Download - page 36

Accounts receivable are shown in the consolidated balance sheets net of allowances for doubtful collections and
subsequent customer returns.
Advertising Costs
— Advertising costs, consisting primarily of catalog preparation, printing and postage expenditures,
are amortized over the period of catalog distribution during which the benefits are expected, generally one to six
months. Expenditures relating to television and local radio advertising are expensed in the period the advertising takes
place.
Net advertising expenses of $21.4 million in 2006, $39.4 million in 2005 and $43.8 million in 2004 are included in the
accompanying Consolidated Statements of Operations. 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. The Company accounts for
consideration from vendors as a reduction of cost of sales unless certain conditions are met showing that the funds are
used for specific, incremental, identifiable costs, in which case the consideration is accounted for as a reduction in the
related expense category, such as advertising expense. The amount of vendor consideration recorded as a reduction of
selling, general and administrative expenses totaled $39.6 million for the year ended December 31, 2006, $39.1 million
for the year ended December 31, 2005 and $34.1 million for the year ended December 31, 2004.
Prepaid expenses at December 31, 2006 and 2005 include deferred advertising costs of $3.5 million and $5.0 million,
respectively, which are reflected as an expense during the periods benefited, typically the subsequent fiscal quarter.
Software Development Costs
–
Software
development costs are expensed as incurred unless they meet GAAP criteria
for deferral and amortization. Software development costs incurred prior to the establishment of technological
feasibility do not meet these criteria. No costs were deferred during 2006, 2005 or 2004 because either no projects met
the criteria for deferral or, if met, the period between achieving technological feasibility and the general availability of
the product was short, rendering the associated costs immaterial.
Derivative Financial Instruments
–
In accordance with the provisions of SFAS 133,
“
Accounting for Derivative
Instruments and Hedging Activities,” as amended, all of the Company’
s derivative financial instruments are recognized
as either assets or liabilities in the consolidated balance sheets based on their fair values. Changes in the fair values are
reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for
hedge accounting. Derivative instruments are designated and accounted for as either a hedge of a recognized asset or
liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For derivatives designated as
effective cash flow hedges, changes in fair values are recognized in other comprehensive income. Changes in fair
values related to fair value hedges as well as the ineffective portion of cash flow hedges are recognized in earnings. The
Company had no derivative instruments as of December 31, 2006 and 2005.
The Company does not use derivative instruments for speculative or trading purposes. Derivative instruments may be
used to manage exposures related to changes in foreign currency exchange rates and interest rate risk on variable rate
indebtedness.
Net Income Per Common Share
– Net income per common share-basic is calculated based upon the weighted average
number of common shares outstanding during the respective periods presented. Net income per common share-diluted
is calculated based upon the weighted average number of common shares outstanding and included the equivalent
shares for dilutive securities outstanding during the respective periods, where the effect is anti-dilutive. The dilutive
effect of outstanding options issued by the Company is reflected in net income per share — diluted using the treasury
stock method.
Under the treasury stock method, options will only have a dilutive effect when the average market price of common
stock during the period exceeds the exercise price of the options. Equivalent common shares of 989,000 in 2006,
842,000 in 2005 and 1,116,000 in 2004 were included for the diluted calculation. The weighted average number of
stock options outstanding excluded from the computation of diluted earnings per share was 36,000 in 2006, 503,000 in
2005 and 587,000 in 2004 due to their antidilutive effect.
Comprehensive Income — Comprehensive income consists of net income and foreign currency translation adjustments
and is included in the Consolidated Statements of Shareholders’ Equity. Comprehensive income was $51,435,000 in
2006, $8,414,000 in 2005 and $12,175,000 in 2004.
Adoption of New Accounting Standard
— Effective January 1, 2006, the Company adopted the provisions of SFAS 123
(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized for
the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but