O'Reilly Auto Parts 2012 Annual Report Download - page 62

FORM 10-k
52
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
O'Reilly Automotive, Inc. (“O’Reilly” or the “Company”) is a specialty retailer and supplier of automotive aftermarket parts. The
Company’s stores carry an extensive product line, including new and remanufactured automotive hard parts, maintenance items and
various automotive accessories. As of December 31, 2012, the Company owned and operated 3,976 stores in 42 states, servicing both
the do-it-yourself (“DIY”) customer and the professional service provider. The Company’s robust distribution system provides stores
with same-day or overnight access to an extensive inventory of hard-to-find items not typically stocked in the stores of other auto parts
retailers.
Segment reporting:
The Company is managed and operated by a single management team reporting to the chief operating decision maker. O'Reilly stores
have similar characteristics including the nature of the products and services, the type and class of customers and the methods used to
distribute products and provide service to its customers and, as a whole, make up a single operating segment. The Company does not
prepare discrete financial information with respect to product lines or geographic locations and as such has one reportable segment.
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.
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 materially differ from those estimates.
Cash equivalents:
Cash equivalents include investments with maturities of 90 days or less on 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 creditworthiness, past transaction history with the customer, current economic and industry trends and changes in
customer payment terms. Amounts due to the Company from its Team Members are included as a component of accounts receivable.
These amounts consist primarily of purchases of merchandise on Team Member accounts. Accounts receivable due from Team
Members was approximately $2.1 million and $2.2 million as of December 31, 2012 and 2011, respectively.
The Company grants credit to certain customers who meet the Company’s pre-established credit requirements. Concentrations of
credit risk with respect to these receivables are limited because the Company’s customer base consists of a large number of small
customers, spreading the credit risk across a broad base. The Company also controls this credit risk through credit approvals, credit
limits and accounts receivable and credit monitoring procedures. Generally, the Company does not require security when credit is
granted to customers. Credit losses are provided for in the Company’s consolidated financial statements and have consistently been
within management’s expectations.
Amounts receivable from vendors:
The Company receives concessions from its vendors through a variety of programs and arrangements, including allowances for new
stores and warranties, volume purchase rebates and co-operative advertising. 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 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 collectability and assesses the
need for a reserve for uncollectable amounts based on an evaluation of the Company’s vendors’ financial positions and corresponding
abilities to meet 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 uncollectable amounts from vendors in
the consolidated financial statements as of December 31, 2012 or 2011.
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 capitalized costs related to procurement, warehousing and distribution centers (“DC”). Cost has been
determined using the last-in, first-out (“LIFO”) method, which more accurately matches costs with related revenues. The replacement
cost of inventory was $2.31 billion and $2.04 billion as of December 31, 2012 and 2011, respectively.