Neiman Marcus 2007 Annual Report Download - page 98

Table of Contents
ESTIMATES AND CRITICAL ACCOUNTING POLICIES
We make estimates and assumptions about future events in preparing our financial statements in conformity with generally
accepted accounting principles. These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and
the disclosure of gain and loss contingencies at the date of the consolidated financial statements.
While we believe that our past estimates and assumptions have been materially accurate, the amounts currently estimated are
subject to change if we make different assumptions as to the outcome of future events. We evaluate our estimates and judgments on an
ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be
reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts and circumstances dictate.
Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in
preparing the accompanying consolidated financial statements.
Cash and Cash Equivalents. Cash and cash equivalents primarily consist of cash on hand in the stores, deposits with banks
and overnight investments with banks and financial institutions. Cash equivalents are stated at cost, which approximates fair value.
Our cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Accounts
payable includes $55.3 million of outstanding checks not yet presented for payment at August 2, 2008 and $55.7 million at July 28,
2007.
Merchandise Inventories and Cost Of Goods Sold. We utilize the retail method of accounting. Under the retail inventory
method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio,
for various groupings of similar items, to the retail value of inventories. The cost of the inventory reflected on the consolidated
balance sheets is decreased by charges to cost of goods sold at the time the retail value of the inventory is lowered through the use of
markdowns. Earnings are negatively impacted when merchandise is marked down. As we adjust the retail value of our inventories
through the use of markdowns to reflect market conditions, our merchandise inventories are stated at the lower of cost or market.
Our sales activities are conducted during two primary selling seasons—Fall and Spring. The Fall selling season is conducted
primarily in our first and second quarters and the Spring selling season is conducted primarily in the third and fourth quarters. During
each season, we record markdowns to reduce the retail value of our inventories. Factors considered in determining markdowns include
current and anticipated demand, customer preferences, age of merchandise and fashion trends. During the season, we record both
temporary and permanent markdowns. Temporary markdowns are recorded at the time of sale and reduce the retail value of only the
goods sold. Permanent markdowns are designated primarily for clearance activity and reduce the retail value of all goods subject to
markdown. At the end of each selling season, we record permanent markdowns for clearance goods remaining in ending inventory.
The areas requiring significant management judgment related to the valuation of our inventories include 1) setting the
original retail value for the merchandise held for sale, 2) recognizing merchandise for which the customer's perception of value has
declined and appropriately marking the retail value of the merchandise down to the perceived value and 3) estimating the shrinkage
that has occurred between physical inventory counts. These judgments and estimates, coupled with the averaging processes within the
retail method can, under certain circumstances, produce varying financial results. Factors that can lead to different financial results
include 1) determination of original retail values for merchandise held for sale, 2) identification of declines in perceived value of
inventories and processing the appropriate retail value markdowns and 3) overly optimistic or conservative estimates of shrinkage. We
believe appropriate merchandise valuation and pricing controls minimize the risk that our inventory values could be materially
misstated.
Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise
we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we
earn in connection with the sales of the vendor's merchandise. These allowances result in an increase to gross margin when we earn
the allowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we pay to
acquire the merchandise. These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are
sold. The amounts of vendor allowances we received did not have a significant impact on the year-over-year change in gross margin
during fiscal years 2008, 2007 or 2006. We received vendor allowances of $109.6 million, or 2.4% of revenues, in fiscal year 2008,
$96.1 million, or 2.2% of revenues, in fiscal year 2007 and $94.5 million, or 2.3% of revenues, in fiscal year 2006 (including $2.4
million for the Predecessor prior to the Acquisition).
We obtain certain merchandise, primarily precious jewelry, on a consignment basis in order to expand our product
assortment. Consignment merchandise with a cost basis of $362.7 million at August 2, 2008 and $307.6 million at July 28, 2007 is not
reflected in our consolidated balance sheets.
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