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PG.42 O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 – SUMM A RY OF S IGNIF IC A N T ACCOUN T ING POL ICIES
NATURE OF BUSINESS
O’Reilly Automotive, Inc. (the “Company”) is a specialty retailer and supplier of automotive aermarket parts, tools, supplies and accessories to
both the do-it-yourself (“DIY”) customer and the professional installer in 38 states.
PRINCIPLES OF CONSOLIDATION
e consolidated nancial statements include the accounts of the Company and its wholly owned subsidiaries. All signicant inter-company
balances and transactions have been eliminated in consolidation. On July 11, 2008, the Company completed the acquisition of CSK Auto
Corporation (“CSK”), one of the largest specialty retailers of auto parts and accessories in the Western United States and one of the largest such
retailers in the United States, based on store count. e results of CSK’s operations have been included in the Company’s consolidated nancial
statements since the acquisition date.
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
e preparation of the consolidated nancial statements, in conformity with accounting principles generally accepted in the United States
(“GAAP”), requires management to make estimates and assumptions that aect the amounts reported in the consolidated nancial statements
and accompanying notes. Actual results could dier from those estimates.
CASH EQUIVALENTS
Cash equivalents consist of investments with maturities of 90 days or less at the day of purchase.
ACCOUNTS RECEIVABLE
e Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to
make required payments. e 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, rst-out (“LIFO”)
method. e replacement cost of inventory was $1,630,549,000 and $888,299,000 as of December 31, 2008 and 2007, respectively.
AMOUNTS RECEIVABLE FROM VENDORS
e 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, specic to a product or event and identiable 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. e 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’ nancial positions and corresponding abilities to meet nancial 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 nancial statements at December 31, 2008 and 2007.
DEBT ISSUANCE COSTS
Deferred debt issuance costs of $39.2 million, net of amortization, are included in Other assets as of December 31, 2008. Deferred debt issuance
costs are being amortized using the straight-line method over the term of the corresponding long-term debt issue and are included in interest
expense in our Consolidated Statements of Income.
INVESTMENTS
e Company determines the appropriate classication 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, consisting of the Company’s investment in the stock of CSK,
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,