Overstock.com 2007 Annual Report Download - page 99

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Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Prepaid inventory
Prepaid inventory represents inventory paid for in advance of receipt. Prepaid inventory at December 31, 2006 and 2007 was $2.2 million and
$3.6 million, respectively.
Prepaid expenses
Prepaid expenses represent expenses paid prior to receipt of the related goods or services, including advertising, maintenance, packaging, insurance and
other miscellaneous costs. Total prepaid expenses at December 31, 2006 and 2007 were $7.5 million and $7.6 million, respectively.
Property and equipment
Property and equipment, which includes capitalized leases, are recorded at cost and depreciated using the straight-line method over the estimated useful
lives of the related assets or the term of the related lease, whichever is shorter, as follows:
Years
Computer software 3
Computer hardware 3
Furniture and equipment 3-5
Leasehold improvements are amortized over the shorter of the term of the related leases or estimated service lives. Upon sale or retirement of assets, cost
and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in the consolidated statement of operations.
Internal-Use Software and Website Development
The Company includes in fixed assets the capitalized cost of internal-use software and website development, including software used to upgrade and
enhance its Website and processes supporting the Company's business. As required by Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, the Company capitalizes costs incurred during the application development stage of internal-use software
and amortizes these costs over the estimated
F-10