Sally Beauty Supply 2011 Annual Report Download - page 80

Off-Balance Sheet Financing Arrangements
At September 30, 2011 and 2010, we had no off-balance sheet financing arrangements other than operating
leases incurred in the ordinary course of business, interest rate swaps, as well as outstanding letters of
credit related to inventory purchases and self insurance programs, which totaled $16.0 million and
$14.5 million, respectively.
Inflation
Inflation has not had a material effect on our results of operations during each of the last three fiscal years.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of
contingent assets and liabilities in the financial statements. Actual results may differ from these estimates.
We believe these estimates and assumptions are reasonable. We consider accounting policies to be critical
when they require us to make assumptions about matters that are highly uncertain at the time the
accounting estimate is made and when different estimates that our management reasonably could have
used have a material effect on the presentation of our financial condition, changes in financial condition or
results of operations.
Our critical accounting estimates include but are not limited to the valuation of inventory, vendor
concessions, retention of risk, income taxes, assessment of long-lived assets and intangible assets with
definite lives for impairment and share-based payments.
Valuation of Inventory
Inventory is stated at the lower of cost, determined using the first-in, first-out (‘‘FIFO’’) method, or market
(net realizable value). When necessary, the Company adjusts the carrying value of inventory to the lower of
cost or market, including disposal costs, and for estimated inventory shrinkage. Estimates of the future
demand for the Company’s products, historical turn-over rates, the age and sales history of the inventory,
and historic as well as anticipated changes in stock keeping units (‘‘SKUs’’) are some of the key factors
used by management in assessing the net realizable value of inventory. We estimate inventory shrinkage
between physical counts based upon our historical experience. Actual results differing from these estimates
could significantly affect our inventory and cost of products sold and distribution expenses. Inventory
shrinkage expense averaged approximately 1.0% of consolidated net sales in fiscal years 2011, 2010 and
2009. A 10% increase or decrease in our estimate of inventory shrinkage at September 30, 2011, would
impact net earnings by approximately $1.6 million, net of income tax.
Vendor Rebates and Concessions
The Company deems a cash consideration received from a supplier to be a reduction of the cost of
products sold unless it is in exchange for an asset or service or a reimbursement of a specific, incremental,
identifiable cost incurred by the Company in selling the vendor’s products. The majority of cash
consideration received by the Company is considered to be a reduction of the cost of the related products
and is reflected in cost of products sold and distribution expenses in our consolidated statements of
earnings as the related products are sold. Any portion of such cash consideration received that is
attributable to inventory on hand is reflected as a reduction of inventory. We consider the facts and
circumstances of the various contractual agreements with vendors in order to determine the appropriate
classification of amounts received in the consolidated statements of earnings. We record cash
consideration expected to be received from vendors in other receivables at the amount we believe will be
collected. These receivables could be significantly affected if actual results differ from management’s
expectations. A 10% increase or decrease in these receivables at September 30, 2011, would impact net
earnings by approximately $1.5 million, net of income tax.
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