Overstock.com 2011 Annual Report Download - page 113

Table of Contents
Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2. ACCOUNTING POLICIES (Continued)
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. Cost of goods sold, including product cost and other costs and
fulfillment and related costs are as follows (in thousands):
Year ended December 31,
2011 2010 2009
Total net revenue $ 1,054,277 100% $ 1,089,873 100% $ 876,769 100%
Cost of goods sold
Product costs and other cost of goods sold 821,739 78% 842,064 78% 664,537 76%
Fulfillment and related costs 53,450 5% 58,169 5% 47,480 5%
Total cost of goods sold 875,189 83% 900,233 83% 712,017 81%
Gross profit $ 179,088 17% $ 189,640 17% $ 164,752 19%
Advertising expense
We expense the costs of producing advertisements the first time the advertising takes place and expense 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 our Website generated during a given period. Advertising expense is included in sales and marketing expenses and totaled $52.5 million,
$53.2 million and $48.9 million during the years ended December 31, 2011, 2010 and 2009, respectively. Prepaid advertising, which consists primarily of
prepaid advertising airtime, (included in Prepaids and other assets in the accompanying consolidated balance sheets) was $1.4 million and $2.9 million at
December 31, 2011 and 2010, respectively.
Stock-based compensation
We measure compensation expense for all outstanding unvested share-based awards at fair value on date of grant and recognize compensation expense
over the service period for awards expected to vest on a straight line basis. 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. We consider many factors
when estimating expected forfeitures, including types of awards, recipients of awards and historical experience. Actual results may differ substantially from
these estimates (see Note 17 "Stock-Based Awards").
Loss contingencies
In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matters when
it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be estimated, the most
probable amount in the range is accrued. If no amount within this range is a better estimate than
F-17