Dick's Sporting Goods 2004 Annual Report Download - page 33

DICK’S SPORTING GOODS, INC. 2004 ANNUAL REPORT 31
Critical Accounting Policies and Use of Estimates
The Company’s significant accounting policies are described in Note 1 of the Consolidated Financial Statements, which were prepared in
accordance with accounting principles generally accepted in the United States of America. Critical accounting policies are those that the
Company believes are both most important to the portrayal of the Company’s financial condition and results of operations, and require
the Company’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially
different amounts being reported under different conditions or using different assumptions.
The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing its
consolidated financial statements.
Inventory Valuation The Company values inventory using the lower of weighted average cost or market method. Market price is generally
based on the current selling price of the merchandise. The Company regularly reviews inventories to determine if the carrying value of the
inventory exceeds market value and the Company records a reserve to reduce the carrying value to its market price, as necessary.
Historically, the Company has rarely experienced significant occurrences of obsolescence or slow-moving inventory. However, future
changes such as customer merchandise preference, unseasonable weather patterns, or business trends could cause the Company’s
inventory to be exposed to obsolescence or slow-moving merchandise.
Shrink expense is accrued as a percentage of merchandise sales based on historical shrink trends. The Company performs physical
inventories at the stores and distribution centers throughout the year. The reserve for shrink represents an estimate for shrink for each of
the Company’s locations since the last physical inventory date through the reporting date. Estimates by location and in the aggregate are
impacted by internal and external factors and may vary significantly from actual results.
Vendor Allowances Vendor allowances include allowances, rebates and cooperative advertising funds received from vendors. These funds
are determined for each fiscal year and the majority are based on various quantitative contract terms. Amounts expected to be received
from vendors relating to the purchase of merchandise inventories are recognized as a reduction of cost of goods sold as the merchandise
is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded as a reduction to the related
expense in the period that the related expense is incurred. The Company records an estimate of earned allowances based on the latest
projected purchase volumes and advertising forecasts. On an annual basis at the end of the year, the Company confirms earned
allowances with vendors to ensure the amounts are recorded in accordance with the terms of the contract.
Goodwill, Intangible Assets and Impairment of Long-Lived Assets Goodwill and other intangible assets must be tested for impairment
on an annual basis. Our evaluation of goodwill and intangible assets with indefinite useful lives for impairment requires accounting
judgments and financial estimates in determining the fair value of such assets. If these judgments or estimates change in the future,
we may be required to record impairment charges for these assets.
The Company reviews long-lived assets whenever events and circumstances indicate that the carrying value of these assets may not be
recoverable based on estimated undiscounted future cash flows. Assets are reviewed at the lowest level for which cash flows can be
identified, which is the store level. In determining future cash flows, significant estimates are made by the Company with respect to future
operating results of each store over its remaining lease term. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Business Combinations Our acquisition of Galyan’s is accounted for under the purchase method of accounting. The assets and liabilities
of Galyan’s are adjusted to their fair values and the excess of the purchase price over the net assets acquired is recorded as goodwill.
The purchase price allocation as of January 29, 2005 is preliminary. The determination of fair values involves the use of estimates and
assumptions, which may differ from actual results in the future. While we believe the factors considered and the independent appraisal
performed will provide a reasonable basis for determining fair value, we cannot guarantee that the estimates and assumptions used will
prevent adjustments to those estimates in future periods.
Self-Insurance The Company is self-insured for certain losses related to health, workers’ compensation and general liability insurance,
although we maintain stop-loss coverage with third-party insurers to limit our liability exposure. Liabilities associated with these losses
are estimated in part by considering historical claims experience, industry factors, severity factors and other actuarial assumptions.