Circuit City 2009 Annual Report Download - page 24

Table of Contents
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Item 15 of this Form 10-K .
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.
We identify below a number of policies that entail significant judgments or estimates. 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.
Allowance for Doubtful Accounts Receivable
. 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.
Inventory valuation
. We value our inventories at the lower of cost or market, cost being determined on the first-in, first-out method except in
Europe and retail locations where an average cost is used. Excess and obsolete or unmarketable merchandise are written down 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.
Goodwill and Intangible Assets. We apply the provisions of relevant accounting guidance in our valuation of goodwill, trademarks, domain
names, client lists and other intangible assets. Relevant accounting guidance requires that goodwill and indefinite lived intangibles be reviewed
at least annually for impairment or more frequently if indicators of impairment exist. The amount of an impairment loss would be recognized as
the excess of the asset’s carrying value over its fair value.
Long
-lived Assets. Management exercises judgment in evaluating our long-
lived assets for impairment and in their depreciation and amortization
methods and lives. 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 regarding such cash flows could materially affect
our evaluations.
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