Overstock.com 2009 Annual Report Download - page 111

Table of Contents
Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2. ACCOUNTING POLICIES (Continued)
Valuation of inventories
The Company writes down its inventory for estimated obsolescence and to lower of cost or market value based upon assumptions about future demand
and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Once established, the original cost of the inventory less the related inventory allowance represents the new cost basis of such products. Reversal of these
allowances is recognized only when the related inventory has been sold or scrapped. At December 31, 2008, the Company's inventory balance was
$24.7 million (including $9.8 million of inventory in-transit), net of allowance for obsolescence or damaged inventory of $2.1 million. At December 31, 2009,
the Company's inventory balance was $23.4 million (including $8.0 million of inventory in-transit), net of allowance for obsolescence or damaged inventory
of $2.2 million.
Cost of goods sold
Cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs, customer service costs and credit
card fees, and is 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. Cost of goods sold, including product cost and other costs and fulfillment costs are as follows (in
thousands):
Year ended December 31,
2007 2008 2009
(Restated)
Total net revenue $ 765,902 100% $ 829,850 100% $ 876,769 100%
Cost of goods sold
Product costs and other cost of goods sold 594,276 78% 638,368 77% 664,537 76%
Fulfillment costs 47,076 6% 47,246 6% 47,480 5%
Total cost of goods sold 641,352 84% 685,614 83% 712,017 81%
Gross profit $ 124,550 16% $ 144,236 17% $ 164,752 19%
Advertising expense
The Company expenses the costs of producing advertisements 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 or 2) a referral fee based on the number
of clicks on keywords or links to the Company's Website generated during a given period. Advertising expense is included in sales and marketing expenses
and totaled $51.0 million, $52.8 million and $48.9 million during the years ended December 31, 2007, 2008 and 2009, respectively. Prepaid advertising,
which consist primarily of prepaid advertising airtime, (included in Prepaids and other assets in the accompanying Consolidated Balance Sheets) was
$877,000 and $1.6 million at December 31, 2008 and 2009, respectively.
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