O'Reilly Auto Parts 2000 Annual Report Download - page 26

2000 AR
24
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
O’Reilly Automotive, Inc. (“the Company”) is a specialty retailer
and supplier of automotive aftermarket parts, tools, supplies
and accessories to both the DIY customer and the professional
installer throughout Arkansas, Illinois, Iowa, Kansas, Louisiana,
Missouri, Nebraska, Oklahoma and Texas.
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated
in consolidation.
Revenue Recognition
The Company recognizes sales upon shipment of products.
Use of Estimates
The preparation of consolidated financial statements, in conformity
with accounting principles generally accepted in the United States
(“GAAP”), requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
Inventory
Inventory, which consists of automotive hard parts, maintenance
items, accessories and tools, is stated at the lower of cost or
market. Cost has been determined using the last-in, first-out
(“LIFO”) method. If the first-in, first-out (“FIFO”) method of costing
inventory had been used by the Company, inventory would have
been $369,869,000 and $291,077,000 as of December 31, 2000,
and 1999, respectively.
Amounts Receivable from Vendors
Amounts receivable from vendors consist primarily of
amounts due the Company for changeover merchandise,
rebates and other allowances.
Property and Equipment
Property and equipment are carried at cost. Depreciation is
provided on straight-line and accelerated methods over the
estimated useful lives of the assets. Service lives for property
and equipment generally range from three to forty years.
Leasehold improvements are amortized over the terms of the
underlying leases. Maintenance and repairs are charged to expense
as incurred. Upon retirement or sale, the cost and accumulated
depreciation are eliminated and the gain or loss, if any, is included
in the determination of net income as a component of other
income (expense). The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable.
The Company capitalizes interest costs as a component of
construction in progress, based on the weighted-average rates
paid for long-term borrowings. Total interest costs capitalized
for the years ended December 31, 2000, 1999 and 1998, were
$1,354,000, $1,134,000 and $1,213,000, respectively.
Income Taxes
The Company accounts for income taxes using the liability method
in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 109. The liability method provides that deferred tax
assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising
expense charged to operations amounted to $12,150,000,
$9,428,000 and $8,326,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
Financial Instrument
The Company utilizes interest rate swap agreements to manage
interest rate risk on its floating rate debt. During 1998, the
Company entered into an interest-rate swap agreement to modify
the interest characteristics of its outstanding long-term debt from a
floating rate to a fixed rate basis. This agreement involves the
receipt of floating rate amounts in exchange for fixed rate interest
payments over the life of the agreement without an exchange of
the underlying principal amount. The differential to be paid or
received is accrued as interest rates change and recognized as an
adjustment to interest expense related to the debt. The related
amount payable to or receivable from the counterparty is included
in other liabilities or assets. The fair value of the swap agreement
is not recognized in the consolidated financial statements and
approximates its carrying cost.
Pre-opening Costs
Costs associated with the opening of new stores, which consist
primarily of payroll and occupancy costs, are charged to operations
as incurred.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
O’REILLY AUTOMOTIVE