Napa Auto Parts 2004 Annual Report Download - page 29

27
notes to consolidated financial statements
December 31, 2004
1. Summary of Significant Accounting Policies
Business
Genuine Parts Company and all of its majority-owned subsidiaries
(the Company) is a distributor of automotive replacement parts,
industrial replacement parts, office products and electrical/elec-
tronic materials. The Company serves a diverse customer base
through more than 1,900 locations in North America and, there-
fore, has limited exposure from credit losses to any particular
customer or industry segment. The Company performs periodic
credit evaluations of its customers’ financial condition and
generally does not require collateral.
Principles of Consolidation
The consolidated financial statements include all of the accounts
of the Company. Income applicable to minority interests is
included in selling, administrative and other expenses. Significant
intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in
the United States requires management to make estimates
and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes.
Actual results may differ from those estimates and the differences
could be material.
Revenue Recognition
The Company recognizes revenues from product sales upon
shipment to its customers.
Foreign Currency Translation
The consolidated balance sheets and statements of income of
the Company’s foreign subsidiaries have been translated into U.S.
dollars at the current and average exchange rates, respectively.
The foreign currency translation adjustment is included as a
component of accumulated other comprehensive income (loss).
Cash and Cash Equivalents
The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash
and cash equivalents.
Trade Accounts Receivable and
the Allowance for Doubtful Accounts
The Company evaluates the collectibility of trade accounts
receivable based on a combination of factors. Initially, the
Company estimates an allowance for doubtful accounts as a
percentage of net sales based on historical bad debt experience.
This initial estimate is periodically adjusted when the Company
becomes aware of a specific customer's inability to meet its
financial obligations (e.g. bankruptcy filing) or as a result of
changes in the overall aging of accounts receivable. While the
Company has a large customer base that is geographically
dispersed, a general economic downturn in any of the industry
segments in which the Company operates could result in higher
than expected defaults, and, therefore, the need to revise estimates
for bad debts. For the years ended December 31, 2004, 2003,
and 2002, the Company recorded provisions for bad debts of
approximately $20,697,000, $23,800,000, and $20,900,000,
respectively.
Merchandise Inventories, including
Consideration Received from Vendors
Merchandise inventories are valued at the lower of cost or market.
Cost is determined by the last-in, first-out (LIFO) method for a
majority of automotive parts, electrical/electronic materials and
industrial parts, and by the first-in, first-out (FIFO) method for
office products and certain other inventories. If the FIFO method
had been used for all inventories, cost would have been approxi-
mately $226,914,000 and $187,444,000 higher than reported at
December 31, 2004 and 2003, respectively.
The Company identifies slow moving or obsolete inventories
and estimates appropriate provisions related thereto. Historically,
these losses have not been significant as the vast majority of
the Company’s inventories are not highly susceptible to obsoles-
cence and are eligible for return under various vendor return
programs. While the Company has no reason to believe its
inventory return privileges will be discontinued in the future, its
risk of loss associated with obsolete or slow moving inventories
would increase if such were to occur.
The Company enters into agreements at the beginning of each
year with many of its vendors providing for inventory purchase
incentives and advertising allowances. Generally, the Company
earns inventory purchase incentives and advertising allowances
upon achieving specified volume purchasing levels or other
criteria. The Company accrues for the receipt of inventory pur-
chase incentives and advertising allowances as part of its inventory
cost based on cumulative purchases of inventory to date and
projected inventory purchases through the end of the year or, in
the case of specific advertising allowances, upon completion of
the Company’s obligations related thereto. While management
believes the Company will continue to receive consideration
from vendors in 2005 and beyond, there can be no assurance
that vendors will continue to provide comparable amounts of
incentives and allowances in the future.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist primarily of
prepaid expenses and amounts due from vendors.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets primarily represent the
excess of the purchase price paid over the fair value of the net
assets acquired in connection with business acquisitions.