Restoration Hardware 2014 Annual Report Download - page 83

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Investments
All of the Company’s investments are classified as available-for-sale and are carried at fair value. The
Company invests excess cash primarily in investment-grade interest-bearing securities such as money market
funds, certificates of deposit, commercial paper, municipal and government agency obligations and guaranteed
obligations of the U.S. government, all of which are subject to minimal credit and market risks. Fair value is
determined based on quoted market rates when observable or utilizing data points that are observable, such as
quoted prices, interest rates and yield curves. The cost of available-for-sale marketable securities sold is based on
the specific identification method. Unrealized holding gains and losses, net of tax, are recorded in accumulated
other comprehensive income (loss) on the consolidated statements of stockholders’ equity until realized. Realized
gains and losses are included in selling, general and administrative expenses on the consolidated statements of
operations. Interest income, dividends, amortization and accretion of purchase premiums and discounts on
investments are included in interest expense in the consolidated statements of operations.
Concentration of Credit Risk
The Company maintains its cash and cash equivalent accounts in financial institutions in both U.S. dollar
and Canadian dollar denominations. Accounts at the U.S. institutions are insured by the Federal Deposit
Insurance Corporation (“FDIC”) up to $250,000 and accounts at the Canadian institutions are insured by the
Canada Deposit Insurance Corporation (“CDIC”) up to $100,000 Canadian dollars. As of January 31, 2015 and
February 1, 2014, and at various time throughout these fiscal years, the Company had cash in financial
institutions in excess of the amount insured by the FDIC and CDIC. The Company performs ongoing evaluations
of these institutions to limit its concentration of credit risk.
Accounts Receivable
Accounts receivable consist primarily of receivables from the Company’s credit card processors for sales
transactions and tenant improvement allowances from the Company’s landlords in connection with new leases.
Accounts receivable is presented net of allowance for doubtful accounts, which is recorded on a specific
identification basis. The allowance for doubtful accounts was $2.3 million and $1.6 million as of January 31,
2015 and February 1, 2014, respectively.
Merchandise Inventories
The Company’s merchandise inventories are comprised of finished goods and are carried at the lower of
cost or market, with cost determined on a weighted-average cost method and market determined based on the
estimated net realizable value. To determine if the value of inventory should be marked down below original
cost, the Company considers current and anticipated demand, customer preference and the merchandise age. The
inventory value is adjusted periodically to reflect current market conditions, which requires management
judgments that may significantly affect the ending inventory valuation, as well as gross margin. The significant
estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower
of cost or market reserves) and estimates of inventory shrinkage. The Company adjusts its inventory for
obsolescence based on historical trends, aging reports, specific identification and its estimates of future retail
sales prices.
Reserves for shrinkage are estimated and recorded throughout the period as a percentage of net sales based
on historical shrinkage results and current inventory levels. Actual shrinkage is recorded throughout the year
based upon periodic cycle counts and the results of the Company’s annual physical inventory count. Actual
inventory shrinkage and obsolescence can vary from estimates due to factors including the mix of the Company’s
inventory (which ranges from large furniture to decorative accessories) and execution against loss prevention
initiatives in the Company’s stores, distribution centers, off-site storage locations and with its third-party
transportation providers.
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