LeapFrog 2010 Annual Report Download - page 47

accounting policies, are particularly important to the portrayal of our financial position and results of operations
and require the use of significant estimates and the application of significant judgment by our management. On
an on-going basis, we evaluate our estimates, particularly those related to our critical accounting policies.
The following discussion highlights those policies and the underlying estimates and assumptions, which we
consider critical to an understanding of the financial information in this report.
Revenue Recognition, Allowance for Doubtful Accounts, and Other Accounts Receivables and Revenue Reserves
We derived the majority of our revenue from sales of our technology-based learning products and related
proprietary content. 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 content downloads, delivery is considered to occur when the
download occurs. For professional training services, delivery is considered to occur when the training is
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 represent gross sales less estimated sales returns, allowances for defective products, promotional
markdowns, charge-backs and price changes, and cooperative promotional arrangements. Correspondingly, these
allowances are recorded as reductions of gross accounts receivable.
We reduce gross accounts receivable balance by an allowance for amounts we believe may become uncollectible.
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.
Determining such allowance requires judgment, the result of which may have a significant effect on the amounts
reported in accounts receivable. If changes in the economic climate or in the financial condition of any of our
customers impair or improve their ability to make payments, adjustments to the allowances may be required.
We also provide estimated allowances against revenue and accounts receivable for sales returns, defective
products, promotional markdowns, charge-backs and price changes, and cooperative promotional arrangements
in the same period that the related revenue is recorded. The allowances are estimated utilizing historical
information, maximum known exposures and other available information including current retailer 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 provided allowances, which included the allowances
for doubtful accounts of $0.8 million and $1.1 million as of December 31, 2010 and 2009, respectively.
Inventory Valuation
Inventories are stated at the lower of cost or market value, on a first-in, first-out basis. We record inventory costs
on the balance sheet based on third-party contract manufacturer invoices, which include the contract
manufacturers’ costs for materials, labor and manufacturing overhead related to our products. Inventory
valuation primarily requires estimation of slow-moving, obsolete or excess products. Our estimate of the write-
downs for slow-moving, excess and obsolete inventories is based on management’s review of on-hand
inventories compared to their estimated future usage, product demand forecast, anticipated product selling prices,
the expected product lifecycle, and products planned for discontinuation. If actual future usage, demand for our
products and anticipated product selling prices were less favorable than those projected by our management,
additional inventory write-downs would be required resulting in a negative impact on our gross margin. We
monitor the estimates of inventory write-downs on a quarterly basis. When considered necessary, we make
additional adjustments to reduce inventory to its net realizable value, with corresponding increases to cost of
sales. Inventories included write-downs for slow-moving, excess and obsolete inventories of $2.0 million and
$4.0 million at December 31, 2010 and 2009, respectively.
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