Harris Teeter 2012 Annual Report Download - page 36

•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, net of returns and sales taxes.
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 $320,000, $624,000 and $1,845,000 in fiscal 2012, 2011 and 2010,
respectively. Net advertising expenses of $19,807,000, $20,071,000 and $21,700,000 were included in the Company’s results
of operations for fiscal 2012, 2011 and 2010, 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.
Accounting for uncertainty in income taxes requires that a minimum recognition threshold be met for a tax position taken
or expected to be taken in a tax return before being recognized in the financial statements. The Company has elected to record
interest expense related to unrecognized tax benefits in interest expense. Penalties, if incurred, would be recorded as a component
of income tax expense.
Earnings Per Share (“EPS”)
Basic EPS is based on the weighted average outstanding common shares. Diluted EPS is based on the weighted average
outstanding common shares adjusted by the dilutive effect of potential common stock equivalents resulting from the operation
of the Company’s comprehensive stock option and awards plans.
HARRIS TEETER SUPERMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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