Memorex 2013 Annual Report Download - page 56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2 — Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported asset and liability amounts, and the contingent asset and liability
disclosures at the date of the financial statements, as well as the revenue and expense amounts reported during the period.
Actual results could differ from those estimates.
Foreign Currency. For our international operations where the local currency has been determined to be the functional
currency, assets and liabilities are translated at year-end exchange rates with cumulative translation adjustments included as
a component of shareholders’ equity. Income and expense items are translated at average foreign exchange rates prevailing
during the year. Gains and losses from foreign currency transactions are included in our Consolidated Statements of
Operations.
Cash Equivalents. Cash equivalents consist of highly liquid investments with an original maturity of three months or
less at the time of purchase. The carrying amounts reported in our Consolidated Balance Sheets for cash equivalents
approximate fair value.
Restricted Cash. Cash related to contractual obligations or restricted by management for specific use is classified as
restricted and is included in other assets on our Consolidated Balance Sheets. We did not have any restricted cash as of
December 31, 2013 and had $7.5 million of restricted cash as of December 31, 2012.
Trade Accounts Receivable and Allowances. Trade accounts receivable are stated net of estimated allowances, which
primarily represent estimated amounts associated with customer returns, discounts on payment terms and the inability of
certain customers to make the required payments. When determining the allowances, we take several factors into
consideration, including prior history of accounts receivable credit activity and write-offs, the overall composition of accounts
receivable aging, the types of customers and our day-to-day knowledge of specific customers. Changes in the allowances are
recorded as reductions of net revenue or as bad debt expense (included in selling, general and administrative expense), as
appropriate, in our Consolidated Statements of Operations. In general, accounts which have entered into an insolvency
action, have been returned by a collection agency as uncollectible or whose existence can no longer be confirmed are written
off in full and both the receivable and the associated allowance are removed from our Consolidated Balance Sheet. If,
subsequent to the write-off, a portion of the account is recovered, it is recorded as a reduction of bad debt expense in our
Consolidated Statements of Operations at the time cash is received.
Inventories. Inventories are valued at the lower of cost or market, with cost determined on a first-in, first-out basis. We
provide estimated inventory write-downs for excess, slow-moving and obsolete inventory as well as inventory with a carrying
value in excess of estimated net realizable value.
Derivative Financial Instruments. We recognize all derivatives on the balance sheet at their estimated fair value. Fair
value of our derivative contracts with durations of twelve months or less are classified as current and durations of greater than
twelve months as non-current. Changes in the estimated fair value of derivatives that are not designated as, and qualify for,
hedge accounting are recorded in our results of operations. We do not hold or issue derivative financial instruments for
speculative or trading purposes and we are not a party to leveraged derivatives. If a derivative is designated as, and qualifies
for hedge accounting, depending on the nature of the hedge, changes in the fair value of the derivative are either offset
against the change in fair value of the underlying assets or liabilities through operations or recognized in accumulated other
comprehensive loss in shareholders’ equity until the underlying hedged item is recognized in operations. These gains and
losses are generally recognized as an adjustment to cost of goods sold for inventory-related hedge transactions, or as
adjustments to foreign currency transaction gains or losses included in non-operating expenses for foreign denominated
payables and receivables-related hedge transactions. Cash flows attributable to these derivatives are included with cash flows
of the associated hedged items. The ineffective portion of a derivative’s change in fair value is immediately recognized in our
Consolidated Statements of Operations. See Note 12 — Fair Value Measurements for more information on our derivative
financial instruments.
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