O'Reilly Auto Parts 2002 Annual Report Download - page 40

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 Alabama, Arkansas,
Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina,
Oklahoma, Tennessee 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 the 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 $499,501,000 and
$442,989,000 as of December 31, 2002, and 2001, respectively.
Amounts Receivable from Vendors
Amounts receivable from vendors consist primarily of amounts due the Company for changeover merchandise, rebates
and other allowances. Reserves for uncollectable amounts receivable from vendors are provided for in the Company’s
Consolidated Financial Statements and consistently have been within management’s expectations.
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, 2002,
2001 and 2000, were $369,000, $324,000 and $1,354,000, 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 the 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
$14,442,000, $12,796,000 and $12,150,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
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.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting fo r Stoc k Is s ue d to
Employe e s (“APB 25”), and related interpretations in accounting for its employee stock options because, as discussed
in Note 10, the alternative fair value accounting provided for under SFAS No. 123, Accounting fo r Stoc k-Bas e d
Co mpe ns ation, requires the use of option valuation models that were not developed for use in valuing employee stock
options. Under the intrinsic method in accordance with APB 25, because the exercise price of the Company’s stock
options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38 O’Reilly Automotive