Cracker Barrel 2010 Annual Report Download - page 34

value using a risk-free interest rate based on actuarially
projected timing of payments. We also monitor actual claims
development, including incurrence or selement of
individual large claims during the interim period between
actuarial studies as another means of estimating the
adequacy of our reserves.
Our accounting policies regarding insurance reserves
include certain actuarial assumptions and management
judgments regarding economic conditions, the frequency and
severity of claims and claim development history and
selement practices. We have not made any material changes
in the accounting methodology used to establish our
insurance reserves during the past three years and do not
believe there is a reasonable likelihood that there will be a
material change in the estimates or assumptions used to
calculate the insurance reserves. However, changes in these
actuarial assumptions or management judgments in the future
may produce materially dierent amounts of expense that
would be reported under these insurance programs.
Inventory Valuation
Cost of goods sold includes the cost of retail merchandise
sold at our stores utilizing the retail inventory method
(“RIM”). RIM is an averaging method that is widely used in
the retail industry due to its practicality. Under RIM, the
valuation of our retail inventories at cost and the resulting
gross margins are calculated by applying a cost-to-retail ratio
to the retail value of our inventories. Inherent in the RIM
calculation are certain signicant management judgments and
estimates, including initial markons, markups, markdowns
and shrinkage, which may signicantly impact the gross
margin calculation as well as the ending inventory valuation.
Inventory valuation provisions are included for retail
inventory obsolescence and retail inventory shrinkage. Retail
inventory is reviewed on a quarterly basis for obsolescence
and adjusted as appropriate based on assumptions made by
management and judgment regarding inventory aging and
future promotional activities. Cost of goods sold includes an
estimate of shrinkage that is adjusted upon physical inventory
counts. Annual physical inventory counts are conducted
throughout the third and fourth quarters based upon a
cyclical inventory schedule. An estimate of shrinkage is
recorded for the time period between physical inventory
counts by using a three-year average of the physical invento-
ries’ results on a store-by-store basis.
We have not made any material changes in the methodolo-
gies, estimates or assumptions related to our merchandise
inventories during the past three years and do not believe
there is a reasonable likelihood that there will be a material
change in these estimates or assumptions in the future.
However, actual obsolescence or shrinkage recorded may
produce materially dierent amounts than we have estimated.
Tax Provision
We must make estimates of certain items that comprise our
income tax provision. ese estimates include eective state
and local income tax rates, employer tax credits for items such
as FICA taxes paid on employee tip income, Work Opportu-
nity and Welfare to Work credits, as well as estimates related
to certain depreciation and capitalization policies.
We recognize (or derecognize) a tax position taken or
expected to be taken in a tax return in the nancial statements
when it is more likely than not (i.e., a likelihood of more than
y percent) that the position would be sustained (or not
sustained) upon examination by tax authorities. A recognized
tax position is then measured at the largest amount of benet
that is greater than y percent likely of being realized upon
ultimate selement.
Our estimates are made based on current tax laws, the best
available information at the time of the provision and
historical experience. We le our income tax returns many
months aer our year end. ese returns are subject to audit
by various federal and state governments years aer the
returns are led and could be subject to diering interpreta-
tions of the tax laws. We then must assess the likelihood
of successful legal proceedings or reach a selement with the
relevant taxing authority. Although we believe that the
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