Pier 1 2011 Annual Report Download - page 47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
procured over a relatively short period of time. Pier 1 Imports sells merchandise imported from many countries,
with approximately 56% of its sales derived from merchandise produced in China, approximately 12% derived
from merchandise produced in India, and approximately 21% collectively derived from merchandise produced in
Vietnam, Indonesia, and the United States. The remaining sales were from merchandise produced in various
countries around the world.
Financial instruments – The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. There were no assets or liabilities with a fair value
significantly different from the recorded value as of February 26, 2011 or February 27, 2010.
Risk management instruments: The Company may utilize various financial instruments to manage interest
rate and market risk associated with its on- and off-balance sheet commitments.
From time to time, the Company hedges certain commitments denominated in foreign currencies through
the purchase of forward contracts. The forward contracts are purchased to cover a portion of commitments to buy
merchandise for resale. The Company also, on occasion, uses contracts to hedge its exposure associated with the
repatriation of funds from its Canadian operations. At February 26, 2011 and February 27, 2010, there were no
material outstanding contracts to hedge exposure associated with the Company’s merchandise purchases
denominated in foreign currencies or the repatriation of Canadian funds. For financial accounting purposes, the
Company does not designate such contracts as hedges. Thus, changes in the fair value of both types of forward
contracts would be included in the Company’s consolidated statements of operations. Both the changes in fair
value and settlement of these contracts are included in cost of sales for forwards related to merchandise
purchases and in selling, general and administrative expense for the contracts associated with the repatriation of
Canadian funds.
When the Company enters into forward foreign currency exchange contracts, it enters into them with
major financial institutions and monitors its positions with, and the credit quality of, these counterparties to such
financial instruments.
Accounts Receivable – The Company’s accounts receivable are stated at carrying value less an
allowance for doubtful accounts. These receivables consist largely of third-party credit card receivables for
which collection is reasonably assured. The remaining receivables are periodically evaluated for collectability,
and an allowance for doubtful accounts is recorded as appropriate.
Inventories – The Company’s inventory is comprised of finished merchandise and is stated at the lower
of weighted average cost or market value. Cost is calculated based upon the actual landed cost of an item at the
time it is received in the Company’s warehouse using vendor invoices, the cost of warehousing and transporting
merchandise to the stores and other direct costs associated with purchasing merchandise.
The Company recognizes known inventory losses, shortages and damages when incurred and maintains a
reserve for estimated shrinkage since the last physical count, when actual shrinkage was recorded. The reserves
for estimated shrinkage at the end of fiscal 2011 and 2010 were $6,446,000 and $5,388,000, respectively.
Properties, maintenance and repairs – Buildings, equipment, furniture and fixtures, and leasehold
improvements are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line
method over estimated remaining useful lives of the assets, generally thirty years for buildings and three to ten
years for equipment, furniture and fixtures. Depreciation of improvements to leased properties is based upon the
shorter of the remaining primary lease term or the estimated useful lives of such assets. Depreciation related to
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