O'Reilly Auto Parts 2006 Annual Report Download - page 33

o’reilly automotive 2006 annual report
page 31
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 the merchandise. Sales to professional installers, also referred to as
“commercial sales,” are recorded upon delivery of the 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 the merchandise. All sales are recorded net of estimated allowances,
discounts and taxes.
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 date of purchase.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make
required payments. The Company considers the following factors when determining if collection is reasonably assured: customer credit-worthiness,
past transaction history with the customer, current economic industry trends and changes in customer payment terms.
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.
The replacement cost of inventory, which approximates that determined using the first-in, first-out (“FIFO”) method of costing inventory, was
$833,626,000 and $738,877,000 as of December 31, 2006 and 2005, respectively.
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 to the cost of inventory. 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 3 to 39 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, 2006, 2005 and 2004 were $2,639,000, $2,885,000 and $2,579,000, respectively.
notes to consolidated financial statements