O'Reilly Auto Parts 2005 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 do-it-yourself (DIY) customer and the professional installer throughout Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas,
Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Carolina, North Dakota, Oklahoma, South Carolina, South
Dakota, Tennessee, Texas, Virginia, Wisconsin and Wyoming.
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.
Cash Equivalents
Cash equivalents consist of investments with maturities of 90 days or less at the day of purchase.
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 $738,877,000 and $628,309,000 as
of December 31, 2005 and 2004, 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
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 includes amounts due to the Company for changeover merchandise and product returns.
Reserves for uncollectible 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 thirty-nine years. Leasehold improvements are amortized over the lesser of the lease
term or the estimated 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 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, 2005, 2004 and 2003 were $2,885,000, $2,579,000 and $1,808,000, respectively.
Leases
The Company’s policy is to amortize leasehold improvements over the lesser of the lease term or the estimated economic life of those assets. Generally,
for stores the lease term is the base lease term and for distribution centers the lease term includes the base lease term plus certain renewal option
periods for which renewal is reasonably assured and failure to exercise the renewal option would result in an economic penalty. The calculation for
O’REILLY AUTOMOTIVE 2005 ANNUAL REPORT
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notes to consolidated financial statements