O'Reilly Auto Parts 2003 Annual Report Download - page 42

notes to consolidated financial statements
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 do-it-yourself (DIY) customer and the professional installer throughout Alabama, Arkansas, Florida,
Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma,
Tennessee, Texas and Virginia.
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
Over-the-counter retail sales are recorded when the customer takes possession of merchandise. Sales to professional installers, also
referred to as “commercial sales”, are recorded upon delivery of merchandise to the customer, generally at the customer’s place of
business. Wholesale sales to other retailers, also referred to as “jobber sales” are recorded upon shipment of merchandise. All sales
are recorded net of estimated allowances and discounts.
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 $543,924,000 and $499,501,000 as of December 31, 2003, and 2002, respectively. During
2003, the Company entered into various programs and arrangements with certain of its vendors that provide for extended dating and
payment terms for inventory purchases, including pay-on-scan arrangements.
Amounts Receivable from Vendors
The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative
advertising, devaluation programs, allowances for warranties and volume purchase rebates. Co-operative advertising allowances that
are incremental to our advertising program, specific to a product or event and identifiable for accounting purposes are reported as
a reduction of advertising expense in the period in which the advertising occurred. All other vendor concessions are recognized as
a reduction of cost of sales when recognized in the consolidated income statement. Amounts receivable from vendors also include
amounts due the Company for changeover merchandise and product returns. 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 lesser of the useful lives or the term of the respective underlying lease. 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