DSW 2012 Annual Report Download - page 33

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Recent Accounting Pronouncements
Recent Accounting Pronouncements and their impact on DSW are disclosed in Note 2 to the Consolidated Financial
Statements included in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
As discussed in Note 2 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K,
the preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the
date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. We
base these estimates and judgments on our historical experience and other factors we believe to be relevant, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical
experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We
constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.
While we believe that our historical experience and other factors considered provide a meaningful basis for the accounting
policies applied in the preparation of the consolidated financial statements, we cannot guarantee that our estimates and
assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results
inevitably will differ from those estimates, and such differences may be material to our consolidated financial statements. We
believe the following represent the most significant accounting policies, critical estimates and assumptions, among others, used
in the preparation of our consolidated financial statements:
Policy Judgments and Estimates Effect if Actual Results Differ from Assumptions
Revenue Recognition. Revenues from
merchandise sales are recognized upon
customer receipt of merchandise, are net
of returns through period end, exclude
sales tax and are not recognized until
collectibility is reasonably assured.
For sales through the dsw.com sales
channel, we estimate a time lag for
shipments to record revenue when the
customer receives the goods.
We believe a one day change in our
estimate for our dsw.com time lag
would not materially impact our
revenue.
Cost of Sales and Merchandise
Inventories. Merchandise inventories are
stated at lower of cost or market,
determined using the retail inventory
method. The retail inventory method is
used in the retail industry due to its
practicality. Under the retail inventory
method, the valuation of inventories at
cost and the resulting gross profits are
determined by applying a calculated cost
to retail ratio to the retail value of
inventories. The cost of the inventory
reflected on the balance sheet is
decreased by charges to cost of sales at
the time the retail value of the inventory
is lowered through the use of
markdowns, which are reductions in
prices due to customers’ perception of
value. Hence, earnings are negatively
impacted as the merchandise is marked
down prior to sale. Markdowns establish
a new cost basis for inventory. Changes
in facts or circumstances do not result in
the reversal of previously recorded
markdowns or an increase in the newly
established cost basis.
Markdowns require management to
make assumptions regarding customer
preferences, fashion trends and
consumer demand. Inherent in the
calculation of inventories are certain
significant management judgments and
estimates, including setting the original
merchandise retail value, markdowns,
and estimates of losses between physical
inventory counts, or shrinkage, which
combined with the averaging process
within the retail inventory method, can
significantly impact the ending
inventory valuation at cost and the
resulting gross profit. DSW records a
reduction to inventories and a charge to
cost of sales for shrinkage. Shrinkage is
calculated as a percentage of sales from
the last physical inventory date.
Estimates are based on both historical
experience as well as recent physical
inventory results.
Physical inventory counts are taken on
an annual basis and have supported
our shrinkage estimates. If our
estimate of shrinkage, on a cost basis,
were to increase or decrease 0.5% as a
percentage of DSW Inc. net sales, it
would result in a decrease or increase
of approximately $4.6 million to
operating profit.
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