Napa Auto Parts 2006 Annual Report Download - page 32

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Notes to Consolidated Financial Statements
December 31, 2006
1. Summary of Signicant 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, ofce products and electrical/elec-
tronic materials. The Company serves a diverse customer base
through more than 2,000 locations in North America and, there-
fore, has limited exposure from credit losses to any particular
customer, region, or industry segment. The Company performs
periodic credit evaluations of its customers’ nancial condition
and generally does not require collateral.
Principles of Consolidation
The consolidated nancial statements include all of the accounts of
the Company. Income applicable to minority interests is included in
other non-operating expenses (income). Signicant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated nancial statements, in
conformity with U.S. generally accepted accounting principles,
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated nancial state-
ments 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 (loss) income.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturi-
ties 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 receiv-
able 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
specic customer’s inability to meet its nancial obligations (e.g.,
bankruptcy ling) 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, 2006, 2005, and 2004, the Company recorded provisions
for bad debts of approximately $16,472,000, $16,356,000 and
$20,697,000, respectively. At December 31, 2006 and 2005, the
allowance for doubtful accounts was approximately $13,456,000
and $11,386,000, 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, rst-out (LIFO) method for a
majority of automotive parts, electrical/electronic materials, and
industrial parts, and by the rst-in, rst-out (FIFO) method for
ofce products and certain other inventories. If the FIFO method
had been used for all inventories, cost would have been approxi-
mately $316,148,000 and $278,573,000 higher than reported at
December 31, 2006 and 2005, respectively.
The Company identies slow moving or obsolete inventories
and estimates appropriate provisions related thereto. Historically,
these losses have not been signicant as the vast majority of the
Company’s inventories are not highly susceptible to obsolescence
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 associ-
ated 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 incen-
tives and advertising allowances. Generally, the Company earns
inventory purchase incentives and advertising allowances upon
achieving specied volume purchasing levels or other criteria. The
Company accrues for the receipt of inventory purchase 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 specic
advertising allowances, upon completion of the Company’s obliga-
tions related thereto. While management believes the Company will
continue to receive consideration from vendors in 2007 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. Statement of
Financial Accounting Standards (“SFAS”) No. 142, Goodwill and
Other Intangible Assets
(“SFAS No. 142”) requires that when the
fair value of goodwill is less than the related carrying value, entities
are required to reduce the amount of goodwill. In accordance with
the provisions of SFAS No. 142, the Company reviews its goodwill
annually in the fourth quarter, or sooner if circumstances indi-
cate that the carrying amount may exceed fair value. No goodwill
impairments have been recorded in 2006, 2005, or 2004. The
impairment-only approach required by SFAS No. 142 may have
the effect of increasing the volatility of the Company’s earnings
if goodwill impairment occurs at a future date.