Circuit City 2008 Annual Report Download - page 47

Table of Contents
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 accrued 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 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.
The Company provides for uncertain tax positions and related interest and penalties based upon management’s assessment of whether a tax
benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the Company prevails in matters for which
a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax
rate in a given financial statement period may be affected.
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 collectability 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 evaluates collectability of accounts
receivable based on numerous factors, including past transaction history with customers and their credit rating and provides a reserve for
accounts that are potentially uncollectible. Trade receivables are generally written off once all collection efforts have been exhausted.
Accounts receivable are shown in the consolidated balance sheets net of allowances for doubtful collections and subsequent customer
returns.
Advertising Costs — Expenditures for internet, television and local radio advertising are expensed in the period the advertising takes place.
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.
Net advertising expenses were $40.0 million, $47.2 million and $37.4 million during 2008, 2007 and 2006, respectively and 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 $60.4 million, $42.6 million and $39.6 million
during 2008, 2007 and 2006, respectively.
Prepaid expenses as of December 2008 and 2007 include deferred advertising costs of $4.1 million and $3.9 million which are reflected as
an expense during the periods benefited, typically the subsequent fiscal quarter.
Stock based compensation — The Company records share-based payment awards exchanged for employee services at fair value on the date
of grant and expenses the awards in the consolidated statement of operations over the requisite employee service period. Stock-based
compensation expense includes an estimate for forfeitures and is recognized over the expected term of the award on a straight-line basis.
The Company recorded, as a component of selling, general and administrative expenses, amortization of stock-based compensation of
$3,220,000, $3,435,000, and $1,756,000 in 2008, 2007 and 2006, respectively. (See Note 7)
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 941,000,
1,087,000, and 989,000
45
Year ended December 31
2008 2007 2006
Balance, beginning of year
$
914
$
1,061
$
1,316
Charged to expense
1,145
1,400
1,556
Deductions
(1,366
)
(1,547
)
(1,811
)
Balance, end of year
$
693
$
914
$
1,061