Sally Beauty Supply 2006 Annual Report Download - page 68

Table of Contents
Sally Holdings, Inc. and Subsidiaries
(A Wholly-Owned Subsidiary of Alberto-Culver Company)
Notes to Consolidated Financial Statements
The carrying amounts of short-term investments, accounts receivable and accounts payable approximate fair value due to the short
term maturities of these financial instruments. The fair value of long-term debt, including current maturities, approximates the
carrying amounts at September 30, 2006. Fair value estimates are calculated using the present value of the projected debt cash flows
based on the current market interest rates of comparable debt instruments.
(e) Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash investments and
accounts receivable. The Company places its cash investments with high-credit quality financial institutions. Accounts receivable are
generally diversified due to the number of entities comprising the Company’ s customer base and their dispersion across many
geographical regions. The Company believes no significant concentration of credit risk exists with respect to these cash investments
and accounts receivable.
(f) Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the value of sales to customers and do not bear interest. Trade accounts receivable are
stated net of the allowance for doubtful accounts. The allowance for doubtful accounts requires management to estimate future
amounts of receivables to be collected. Management records allowances for doubtful accounts based on historical collection data and
current customer information. Account balances are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
In the consolidated statements of earnings, bad debt expense is included in selling, general and administrative expenses. The
Company’ s exposure to credit risk with respect to trade receivables is mitigated by the Company’ s broad customer base.
(g) Other Receivables
Other receivables consist primarily of amounts expected from vendors under various contractual agreements. Other receivables are
recorded at the amount management estimates will be collected under these agreements.
(h) Inventories
Inventories are stated at the lower of cost (determined by the first-in, first-out method (“FIFO”)) or market (net realizable value).
When necessary, the Company provides allowances to adjust the carrying value of inventories to the lower of cost or market,
including costs to sell or dispose, and for estimated inventory shrinkage. Estimates of the future demand for the Company’ s products
and changes in stock keeping units are some of the key factors used by management in assessing the net realizable value of
inventories. The Company estimates inventory shrinkage based on historical experience.
(i) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method
based on estimated useful lives of the respective classes of assets. Buildings and building improvements are depreciated over periods
ranging from five to forty years. Furniture, fixtures and equipment are depreciated over periods ranging from three to ten years.
Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the term of the related lease,
including renewals determined to be reasonably assured. Expenditures for maintenance and repairs are expensed as incurred while
expenditures for major renewals and improvements are capitalized. Upon the disposition of property and equipment, the cost and
related accumulated depreciation are removed from the accounts.
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