Circuit City 2009 Annual Report Download - page 49

Table of Contents
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 the entire 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, local radio and newspaper 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 $38.9 million, $40.0 million and $47.2 million during 2009, 2008 and 2007, 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 $55.9 million, $60.4 million and $42.6 million
during 2009, 2008 and 2007, respectively.
Prepaid expenses as of December 2009 and 2008 include deferred advertising costs of $2.8 million and $4.1 million which are reflected as
an expense during the periods benefited, typically the subsequent fiscal quarter.
Stock based compensation — The Company recognizes the fair value of share based compensation 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.
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 775,000, 941,000,
and 1,087,000 in 2009, 2008 and 2007, respectively were included for the diluted calculation. The weighted average number of stock
options outstanding excluded from the computation of diluted earnings per share was 711,000, 622,000, and 0 in 2009, 2008 and 2007,
respectively 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 $54.5 million, $34.2 million and $74.0 million in 2009,
2008 and 2007, respectively.
Employee Benefit Plans - The Company’s U.S. subsidiaries participate in a defined contribution 401(k) plan covering substantially all U.S.
employees. Employees may invest 1% or more of their eligible compensation, limited to maximum amounts as determined by the Internal
Revenue Service. The Company provides a matching contribution to the plan, determined as a percentage of the employees’ contributions.
Aggregate expense to the Company for contributions to such plans was approximately $0.9 million, $0.7 million and $0.6 million in 2009,
2008 and 2007, respectively.
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