Harris Teeter 2011 Annual Report Download - page 36

Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or
liability at the measurement date (the exit price). The fair value should be based on assumptions that market participants would
use when pricing the asset or liability. The fair value hierarchy “the valuation hierarchy” that prioritizes the information used
in measuring fair value is as follows:
•Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
•Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly
or indirectly
•Level 3 - Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or
liability.
Revenue Recognition
Revenue is recognized at the point of sale to the customers.
Cost of Sales
The major components of cost of sales are (a) the cost of products sold determined under the Retail Inventory Method (see
“Inventories” above) reduced by purchase cash discounts and vendor purchase allowances and rebates, (b) the cost of various
sales promotional activities reduced by vendor promotional allowances, and reduced by cooperative advertising allowances to
the extent an advertising allowance exceeds the cost of the advertising, (c) the cost of product waste, including, but not limited
to, physical waste and theft, (d) the cost of product distribution, including warehousing, freight and delivery, and (e) any charges,
or credits, associated with LIFO reserves and reserves for obsolete and slow moving inventories. Additionally, the costs of
production of product sold by the dairy operation to outsiders are included in cost of sales in the period in which the sales are
recognized in revenues.
Selling, General and Administrative Expenses
The major components of selling, general and administrative expenses are (a) the costs associated with store operations,
including store labor and training, fringe benefits and incentive compensation, supplies and maintenance, regional and district
management and store support, store rent and other occupancy costs, property management and similar costs, (b) advertising
costs, (c) shipping and handling costs, excluding freight, warehousing and distribution costs, (d) merchandising and purchasing
department staffing, supplies and associated costs, (e) customer service and support, and (f) the costs of maintaining general
and administrative support functions, including, but not limited to, personnel administration, finance and accounting, treasury,
credit, information systems, marketing, and environmental, health and safety, based on appropriate classification under generally
accepted accounting principles.
Advertising
Costs incurred to produce media advertising are expensed in the period in which the advertising first takes place. All other
advertising costs are also expensed when incurred. Cooperative advertising income from vendors is recorded in the period in
which the related expense is incurred and amounted to $624,000, $1,845,000 and $1,972,000 in fiscal 2011, 2010 and 2009,
respectively. Net advertising expenses of $20,071,000, $21,700,000 and $23,858,000 were included in the Company’s results
of operations for fiscal 2011, 2010 and 2009, respectively.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. Tax credits are recorded as a reduction
of income taxes in the years in which they are generated. Deferred tax liabilities or assets at the end of each period are determined
using the tax rate expected to be in effect when taxes are settled or realized. Accordingly, income tax expense will increase or
decrease in the same period in which a change in tax rates is enacted. A valuation allowance is established for deferred tax assets
for which realization is not more likely than not.
RUDDICK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
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