O'Reilly Auto Parts 2004 Annual Report Download - page 41

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, South Carolina, 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 “com-
mercial 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. Inventory also
includes related procurement, warehousing and distribution center costs. 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 $628,309,000 and $513,365,000
as of December 31, 2004 and 2003, respectively. Please refer to Note 2 for cumulative effect of accounting change.
Amounts Receivable from Vendors
The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative advertising, devaluation pro-
grams, 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 receiv-
able from vendors also includes amounts due to 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 a straight-line method 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 lease term or the esti-
mated economic life of the assets. The lease term includes renewal options determined by management at lease inception for which failure to renew
options would result in a substantial economic penalty to the Company. 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 carry-
ing 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, 2004, 2003 and 2002, were $2,579,000, $1,808,000 and $369,000, 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 $22,999,000, $19,533,000 and
$14,442,000 for the years ended December 31, 2004, 2003 and 2002, 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.
2004 ANNUAL REPORT 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS