Rue 21 2011 Annual Report Download - page 50

rue21, inc. and subsidiary
Notes to Consolidated Financial Statements — (continued)
Cost of Goods Sold
Cost of goods sold includes costs related to merchandise sold, distribution and warehousing, freight from the
distribution center to the stores, store occupancy, and buying and merchandising department expenses. Cost of
goods sold is reduced by certain vendor allowances received, primarily for markdowns, merchandise marked out of
stock and vendor non-compliance charges.
Selling, General and Administrative Expense
Selling, general and administrative expense includes administration, share-based compensation and store
expenses but excludes store occupancy costs and freight to stores.
Income Taxes
The Company accounts for income taxes in accordance with the authoritative guidance issued by the FASB,
which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized based on the difference between the carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments
regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are
expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than
not that some portion or all of the deferred taxes may not be realized. Changes in the level and composition of
earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits may materially impact
the effective tax rate.
The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with the
FASB’s authoritative guidance related to uncertain tax positions and adjust these liabilities when our judgment
changes as the result of the evaluation of new information. The Company classifies interest and penalties as an
element of tax expense.
The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from
an uncertain position and to establish a valuation allowance require management to make estimates and
assumptions. The Company believes that its assumptions and estimates are reasonable, although actual results may
have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation
allowances, or net income. See Note 8 “Income Taxes”.
Stock Based Compensation
The Company accounts for share based compensation awards in accordance with the FASB’s authoritative
guidance, which requires companies recognize all share based payments to employees, including grants of employee
stock options, in the consolidated financial statements based on the grant date fair value of the equity or liability
instruments issued. The Company recognizes compensation expense for stock option awards on a straight-line basis
over the requisite service period of the award. The Company has historically issued new shares of common stock
upon the exercise of employee stock options. See Note 5 “Stock-Based Compensation.”
Store Pre-opening Costs
Store pre-opening costs, which consist primarily of occupancy costs and payroll, are expensed as incurred and
are included in selling, general and administrative expense in the accompanying Consolidated Statements of
Income.
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