Napa Auto Parts 2008 Annual Report Download - page 32

notes to consolidated nancial statements
december 31, 2008
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, office products, and electrical/elec-
tronic materials. e Company serves a diverse customer base
through more than 2,000 locations in North America and, therefore,
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 statements
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 maturities
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 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. 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, 2008, 2007, and
2006, the Company recorded provisions for bad debts of approxi-
mately $23,883,000, $13,514,000, and $16,472,000, respectively. At
December 31, 2008 and 2007, the allowance for doubtful accounts
was approximately $18,588,000 and $15,521,000, 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 $426,461,000 and $326,816,000 higher than reported at
December 31, 2008 and 2007, 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
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.
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 criteria. e Company
accrues for the receipt of inventory purchase incentives and adver-
tising 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 2009 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 Ac-
counting 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
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