Petsmart 2006 Annual Report Download - page 64

Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents and auction rate
securities. These balances, as presented in the consolidated financial statements at January 28, 2007 and January 29,
2006, approximate their fair value.
Cash and Cash Equivalents
Under the Company’s cash management system, a bank overdraft balance exists for the Company’s primary
disbursement accounts. This overdraft represents uncleared checks in excess of cash balances in the related bank
accounts. The Company’s funds are transferred on an as-needed basis to pay for clearing checks. As of January 28,
2007 and January 29, 2006, bank overdrafts of $55,964,000 and $40,257,000, respectively, were included in
accounts payable and bank overdraft in the Consolidated Balance Sheets. The Company considers any liquid
investments with a maturity of three months or less at purchase to be cash equivalents.
Short-term Investments
The Company’s short-term investments consist primarily of Auction Rate Securities, or ARS, which represent
funds available for current operations. In accordance with SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” these short-term investments are classified as available-for-sale and are carried at cost
or par value, which approximates the fair market value. These securities have stated maturities beyond three months
but are priced and traded as short-term instruments.
Restricted Cash and Short-term Investments
The Company is required to maintain a cash or cash equivalent deposit with the lenders of the Company’s letter
of credit facility equal to the amount of the outstanding letters of credit, or in the case of ARS, must have an amount
on deposit, which when multiplied by the advance rate of 85%, is equal to the amount of the outstanding letters of
credit.
Vendor Rebates and Promotions
The Company receives vendor allowances, in the form of rebates and promotions, from agreements made with
certain merchandise suppliers. The Company records rebate income as a reduction of cost of sales, and cooperative
promotional income is recorded as a reduction of operating, general and administrative expenses in the Consol-
idated Statements of Operations and Comprehensive Income. Rebates are initially deferred as a reduction of the cost
of inventory purchased and then recognized as a reduction of cost of sales as the related inventory is sold. Unearned
vendor rebates recorded as a reduction of inventory and the uncollected amounts of vendor rebates and promotional
income remaining in receivables in the Consolidated Balance Sheets as of January 28, 2007 and January 29, 2006,
were not material.
Merchandise Inventories and Cost of Sales
Merchandise inventories represent finished goods and are recorded at the lower of cost or market. Cost is
determined by the moving average cost method and includes inbound freight as well as certain procurement and
distribution costs related to the processing of merchandise. The Company maintains reserves for obsolescence and
lower of cost or market, as well as shrinkage.
Total procurement and distribution costs charged to cost of sales during fiscal 2006, 2005 and 2004 were
$240,807,000, $203,618,000 and $183,710,000, respectively. Procurement and distribution costs remaining in
inventory as of January 28, 2007 and January 29, 2006, were $51,134,000 and $39,093,000, respectively.
F-8
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)