Napa Auto Parts 2007 Annual Report Download - page 32

30
notes฀to฀consolidated฀financial฀statements
december฀31,฀2007
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. e 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. e Company performs
periodic credit evaluations of its customers’ financial condition
and generally does not require collateral.
Principles of Consolidation
e consolidated financial statements include all of the accounts of
the Company. Income applicable to minority interests is included in
other non-operating expenses (income). Significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
e preparation of the consolidated financial 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 financial state-
ments and accompanying notes. Actual results may differ from
those estimates and the differences could be material.
Revenue Recognition
e Company recognizes revenues from product sales upon
shipment to its customers.
Foreign Currency Translation
e 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.
e foreign currency translation adjustment is included as a
component of accumulated other comprehensive (loss) income.
Cash and Cash Equivalents
e Company considers all highly liquid investments with maturi-
ties of three months or less when purchased to be cash equivalents.
Trade Accounts Receivable
and the Allowance for Doubtful Accounts
e Company evaluates the collectability of trade accounts re-
ceivable 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. is 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, 2007, 2006, and 2005, the
Company recorded provisions for bad debts of approximately
$13,514,000, $16,472,000, and $16,356,000, respectively. At
December 31, 2007 and 2006, the allowance for doubtful accounts
was approximately $15,521,000 and $13,456,000, 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
approximately $326,816,000 and $293,464,000 higher than
reported at December 31, 2007 and 2006, respectively.
e 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 obsolescence and are eligible
for return under various vendor return programs. While the Com-
pany 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.
e 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 cri-
teria. e 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
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 2008 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.