O'Reilly Auto Parts 2007 Annual Report Download - page 34

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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, Ohio, 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 inter-company
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 same-day 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 from a regional distribution
center with same-day delivery to the jobber customer's location. 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 day 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 was $888,299,000 and $833,626,000 as of December 31, 2007 and 2006, 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 the
Company’s 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 material 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.
The Company regularly reviews vendor receivables for collectibility and assesses the need for a reserve for uncollectible amounts based on an
evaluation of the Company’s vendors’ financial position and corresponding ability to meet its financial obligations. Management does not believe
there is a reasonable likelihood that the Company will be unable to collect the amounts receivable from vendors and the Company did not
record a reserve for uncollectible amounts in the consolidated financial statements at December 31, 2007 and 2006.
Investments
The Company determines the appropriate classification of marketable equity securities at the time of purchase and reevaluates such designation
as of each balance sheet date. Available-for-sale securities are stated at fair value, with the unrecognized gains and losses, net of tax, reported in
accumulated other comprehensive income (loss). Available-for-sale securities in the amount of $10.8 million, stated at fair value, are included
in Other Current Assets on the Company’s balance sheet at December 31, 2007. The Company did not own any material available-for-sale
securities on December 31, 2006. See Note 2, “Investments”, for information regarding available-for-sale securities acquired during 2007.
Notes to Consolidated Financial Statements