LeapFrog 2015 Annual Report Download - page 60

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
2. Summary of Significant Accounting Policies − (continued)
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
certificates of deposit, 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.
Inventory Valuation
Inventories are stated at the lower of cost or market value, on a first-in, first-out basis. The Company records
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 its products.
Inventory valuation primarily requires estimation of slow-moving, obsolete or excess products. The
Company’s estimate of 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 the Company’s products and anticipated product selling
prices were less favorable than those projected by management, additional inventory write-downs would be
required, resulting in a negative impact on gross margin.
The Company monitors the estimates of inventory write-downs on a quarterly basis. When considered
necessary, the Company makes adjustments to reduce inventory to its net realizable value with corresponding
increases to cost of sales.
Capitalized Content Costs
The Company capitalizes certain external costs related to the development of content for its learning products,
including design, artwork, animation, layout, editing, voice, audio and apps included in the learning products.
Such costs are capitalized once the technological feasibility of the product is established and costs are
determined to be recoverable. Amortization of these costs is included in cost of sales and begins when the
products are initially released for sale and generally continues over a two-year life using the straight-line
method. The Company evaluates the future recoverability of capitalized amounts periodically and recognizes
write-downs of these amounts in cost of sales as needed. Capitalized content costs that are cancelled,
abandoned or otherwise deemed impaired are charged to cost of sales in the period of cancellation.
The Company also capitalizes external Learning Path development costs, which primarily include third-party
costs related to developing applications that are an integral component of certain products the Company
markets. Learning Path development costs are generally amortized on a straight-line basis over two years. The
Company periodically evaluates the remaining useful life of its Learning Path development costs to determine
whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate
of the remaining useful life is considered to be changed during the period, the Company amortizes the
remaining carrying amount of its Learning Path development costs prospectively over that revised remaining
useful life.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation expense is calculated
using the straight-line method over the estimated useful life of the assets, generally between two and
five years, except for leasehold improvements, which are depreciated over the shorter of the estimated related
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