Overstock.com 2007 Annual Report Download - page 104

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cost of goods sold
Cost of goods sold includes product costs, warehousing costs, inbound and outbound shipping costs, handling and fulfillment costs, customer service
costs and credit card fees, and are recorded in the same period in which related revenues have been recorded. Fulfillment costs include warehouse handling
labor costs, fixed warehouse costs, credit card fees and customer service costs. For the years ended December 31, 2005, 2006 and 2007, fulfillment costs
totaled $59.9 million, $60.9 million and $47.1 million, respectively.
Years ended December 31,
(in thousands)
2005 2006 2007
Total revenue $799,316 100% $788,150 100% $760,161 100%
Cost of goods sold
Product costs and other cost of goods sold 622,509 78% 632,494 80% 585,514 77%
Fulfillment costs 59,931 7% 60,856 8% 47,076 6%
Total cost of goods sold 682,440 85% 693,350 88% 632,590 83%
Gross profit $116,876 15% $ 94,800 12% $127,571 17%
Advertising expense
The Company recognizes advertising expenses in accordance with SOP 93-7, Reporting on Advertising Costs. As such, the Company expenses the costs
of producing advertisements at the time production occurs or the first time the advertising takes place and expenses the cost of communicating advertising in
the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual
agreements, which are generally: 1) a commission for traffic driven to the Website that generates a sale 2) based on the number of clicks on keywords or links
to our Website generated during a given period. Advertising expense included in sales and marketing expenses totaled $75.3 million, $68.1 million and
$51.0 million during the years ended December 31, 2005, 2006 and 2007, respectively.
Stock-based Compensation
As of January 1, 2006, the Company adopted SFAS 123(R) Share-based Payment ("SFAS 123(R)"), which requires the Company to measure
compensation expense for all outstanding unvested share-based awards at fair value and recognize compensation expense over the service period for awards
expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from estimates, such
amounts will be recorded as an adjustment in the period estimates are revised. Management considers many factors when estimating expected forfeitures,
including types of awards, employee class, and historical experience. Actual results may differ substantially from these estimates (see "Note 17—Stock Based
Awards" and "Note 18—Performance Share Plan").
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