LeapFrog 2008 Annual Report Download - page 67

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
Reclassifications
Certain amounts in the prior years’ financial statements have been reclassified to conform to the current
year’s presentation.
Revenue Recognition
The Company derives the majority of its revenue from sales of its technology-based learning products and
related proprietary content. The Company recognizes revenue based on the criteria set forth in Staff Accounting
Bulletin “Revenue Recognition” (“SAB 104”). Revenue is recognized when products are shipped and title passes
to the customer, provided that there is evidence of a commercial arrangement, delivery has occurred, there is a
fixed or determinable fee and collection is reasonably assured. For online downloads, delivery is considered to
occur when the download occurs. For professional training services, delivery is considered to occur when the
training has been performed. Amounts billed to customers for shipping and handling costs are recognized as
revenue. Costs incurred to ship merchandise from warehouse facilities are recorded in cost of sales.
Net sales consist of gross sales less negotiated price allowances based primarily on volume purchasing
levels, estimated returns, allowances for defective products, markdowns and other sales allowances for customer
promotions and other cooperative advertising arrangements. Correspondingly, these allowances are recorded as
reductions of gross accounts receivable.
Allowances for Doubtful Accounts, Sales Returns, Defective Products, Discounts and Promotions
The Company reduces gross accounts receivable by an allowance for amounts it believes may become
uncollectible. Determining the amounts that may become uncollectible requires judgment that may have a
significant effect on the amounts reported in accounts receivable. This allowance is an estimate based primarily
on management’s evaluation of the customer’s financial condition in the context of current economic conditions,
past collection history and aging of the accounts receivable balances. The provision for uncollectible accounts is
included in selling, general and administrative expense in the statements of operations.
The Company also provides estimated allowances against revenues and accounts receivable for sales
returns, defective products, charge-backs, discounts and co-operative promotional agreements in the same period
that the related revenue is recorded. The allowances are estimated utilizing historical information for existing
products. For new products, the allowance is estimated for product returns on the basis of the specific terms for
product returns of that product. The Company also considers its retailers current inventory levels, sell-through of
its retailers and distributors, current trends in retail for its products, changes in customer demand for its products
and other related factors. Accounts receivable are reported on the balance sheet net of all allowances that have
been provided.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and money market funds with original maturities of three months
or less.
Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”)
No. 157 “Fair Value Measurements,” (“SFAS 157”) with respect to its financial assets and liabilities (“financial
instruments”) only, pursuant to the guidance of FASB Staff Position No. FSP FAS 157-2, “Effective Date of
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