Overstock.com 2006 Annual Report Download - page 87

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Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of
related estimated tax provisions or benefits.
The Company periodically evaluates whether declines in fair values of its investments are other-than-temporary. This evaluation
consists of a review of qualitative and quantitative factors, including quoted market prices, if available, other publicly available
information, or other conditions that bear on the value of our investments. At December 31, 2005 and 2006, gross unrealized losses on
marketable securities were $54,000 and zero, respectively, and were determined to be temporary based on the Company's assessment
of the qualitative and quantitative factors discussed above.
Accounts receivable
Accounts receivable consist of trade amounts due from customers and from uncleared credit card transactions at period end.
Accounts receivable are recorded at invoiced amounts and do not bear interest. The Company evaluates its allowance for doubtful
accounts monthly. Account balances are written-off against the allowance when it is probable that the receivable will not be
recovered. The Company recorded an allowance for doubtful accounts of $1.8 million and $2.1 million at December 31, 2005 and
2006, respectively.
Concentration of credit risk
Cash equivalents include short-term, highly liquid instruments with original maturities of 90 days or less. At December 31, 2005
and 2006, two banks held the Company's cash and cash equivalents. The Company does not believe that, as a result of this
concentration, it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash
equivalents, investment securities, and receivables. The Company invests its cash primarily in money market, government and
corporate securities which are uninsured.
The Company's accounts receivable are derived primarily from revenue earned from customers located in the United States. The
Company maintains an allowance for doubtful accounts based upon the expected collectibility of accounts receivable.
Inventories
Inventories, consisting of merchandise purchased for resale, are accounted for using a standard costing system which
approximates the first-in-first-out ("FIFO") method of accounting, and are valued at the lower of cost or market value. The Company
establishes reserves for estimated obsolescence or damage equal to the difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and market conditions. Once established, the original cost of the inventory
less the related reserve represents the new cost basis of such products. Reversal of these reserves is recognized only when the related
inventory has been sold or scrapped.
Until the time of shipping, inventory ownership related to product sales by third parties through the Company's website is
maintained by the third parties.
Prepaid inventory
Prepaid inventory represents inventory paid for in advance of receipt. Prepaid inventory at December 31, 2005 and 2006 was $9.6
million and $2.2 million, respectively.
F-9