Pep Boys 2008 Annual Report Download - page 93

Effects of Inflation
We use the LIFO method of inventory valuation. Thus, the cost of merchandise sold approximates
current cost. Although we cannot accurately determine the precise effect of inflation on its operations,
we do not believe inflation has had a material effect on revenues or results of operations during all
fiscals years presented.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and judgments, including
those related to customer incentives, product returns and warranty obligations, bad debts, inventories,
income taxes, financing operations, restructuring costs, retirement benefits, share-based compensation,
risk participation agreements and contingencies and litigation. Management bases its estimates and
judgments on historical experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe that the following represent our more critical estimates and assumptions used in the
preparation of the consolidated financial statements, although not all inclusive:
• Inventory is stated at the lower of cost as determined under LIFO or market in the consolidated
financial statements. We evaluate whether inventory is stated at the lower of cost or market
based on historical experience with the carrying value and current market conditions. In
addition, historically we have been able to return excess items to vendors for credit. Future
changes in vendors, in their policies or in their willingness to accept returns of excess inventory
could require a revision in the estimates. If our estimates regarding excess or obsolete inventory
are inaccurate, we may incur losses or gains that could be material. A 10% difference in these
estimates at January 31, 2009 would have affected net loss by approximately $1 million for the
fiscal year ended January 31, 2009.
• We have risk participation arrangements with respect to casualty and health care insurance,
including the maintaining of stop loss coverage with third party insurers to limit our total
exposure. A reserve for the liabilities associated with these agreements is established using
generally accepted actuarial methods followed in the insurance industry and our historical claims
experience. The amounts included in our costs related to these arrangements are estimated and
can vary based on changes in assumptions, claims experience or the providers included in the
associated insurance programs. A 10% change in our self-insurance liabilities at January 31, 2009
would have affected net loss by approximately $6.3 million for the fiscal year ended January 31,
2009.
• We record reserves for future product returns, warranty claims and inventory shrinkage. The
reserves are based on expected returns of products and historical claims and inventory shrinkage
experience. If actual experience differs from historical levels, revisions in our estimates may be
required. A 10% change in these reserves at January 31, 2009 would have affected net loss by
approximately $1 million for the fiscal year ended January 31, 2009.
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