LeapFrog 2010 Annual Report Download - page 59

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. 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 consist of gross sales less negotiated price allowances based primarily on volume purchasing levels,
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.
Allowances for Doubtful Accounts, Sales Returns, Defective Products and Promotions
The Company reduces gross accounts receivable by an allowance for amounts it believes 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. The provision for uncollectible accounts is included in selling, general and
administrative (“SG&A”) expense in the statements of operations.
The Company also provides 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.
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
Fair values of the Company’s financial instruments, consisting of short-term money market funds and long-term
investments in auction rate securities (“ARS”), reflect the estimates of exit price, or the amounts that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of
the measurement date.
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