Foot Locker 2013 Annual Report Download - page 64

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Foot Locker, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies − (continued)
Contingently issuable shares of 0.2 million, 0.1 million, and 0.9 million stock at February 1, 2014, February 2, 2013,
and January 28, 2012, respectively, have not been included as the vesting conditions have not been satisfied.
Share-Based Compensation
The Company recognizes compensation expense in the financial statements for share-based awards based on
the grant date fair value of those awards. Additionally, stock-based compensation expense includes an esti-
mate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards. See Note 22,
Share-Based Compensation, for information on the assumptions the Company used to calculate the fair value
of share-based compensation.
Upon exercise of stock options, issuance of restricted stock or units, or issuance of shares under the employees
stock purchase plan, the Company will issue authorized but unissued common stock or use common stock held
in treasury. The Company may make repurchases of its common stock from time to time, subject to legal and
contractual restrictions, market conditions, and other factors.
Cash and Cash Equivalents
Cash equivalents at February 1, 2014 and February 2, 2013 were $819 million and $841 million, respectively.
Cash equivalents include amounts on demand with banks and all highly liquid investments with original matu-
rities of three months or less, including commercial paper and money market funds. Additionally, amounts due
from third-party credit card processors for the settlement of debit and credit card transactions are included as
cash equivalents as they are generally collected within three business days.
Investments
Changes in the fair value of available-for-sale securities are reported as a component of accumulated other
comprehensive loss in the Consolidated Statements of Shareholders’ Equity and are not reflected in the Con-
solidated Statements of Operations until a sale transaction occurs or when declines in fair value are deemed to
be other-than-temporary. The Company routinely reviews available-for-sale securities for other-than-temporary
declines in fair value below the cost basis, and when events or changes in circumstances indicate the carrying
value of a security may not be recoverable, the security is written down to fair value. As of February 1, 2014, the
Company held $15 million of available-for-sale securities, which was comprised of $9 million in short-term
investments and a $6 million auction rate security. See Note 20, Fair Value Measurements, for further discussion
of these investments.
Merchandise Inventories and Cost of Sales
Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using the
retail inventory method. Cost for retail stores is determined on the last-in, first-out (‘‘LIFO’’) basis for domestic
inventories and on the first-in, first-out (‘‘FIFO’’) basis for international inventories. The retail inventory method
is commonly used by retail companies to value inventories at cost and calculate gross margins due to its prac-
ticality. Under the retail inventory method, cost is determined by applying a cost-to-retail percentage across
groupings of similar items, known as departments. The cost-to-retail percentage is applied to ending inventory
at its current owned retail valuation to determine the cost of ending inventory on a department basis. The
Company provides reserves based on current selling prices when the inventory has not been marked down to
market. Merchandise inventories of the Direct-to-Customers business are valued at the lower of cost or market
using weighted-average cost, which approximates FIFO. Transportation, distribution center, and sourcing costs
are capitalized in merchandise inventories. The Company expenses the freight associated with transfers
between its store locations in the period incurred. The Company maintains an accrual for shrinkage based on
historical rates.
Cost of sales is comprised of the cost of merchandise, occupancy, buyers’ compensation, and shipping and
handling costs. The cost of merchandise is recorded net of amounts received from vendors for damaged prod-
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