Supercuts 2005 Annual Report Download - page 66

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Receivables and Allowance for Doubtful Accounts:
The receivable balance on the Company’s Consolidated Balance Sheet is presented net of an allowance for expected losses (i.e., doubtful
accounts) primarily related to receivables from its franchisees. The Company monitors the financial condition of its franchisees and records
provisions for estimated losses on receivables when it believes that its franchisees are unable to make their required payments based on factors
such as delinquencies and aging trends. In such regards, the allowance for doubtful accounts is our best estimate of the amount of probable
credit losses related to our existing accounts receivable. The Company also reserves certain receivables fully once they have reached a set age
category.
The following table summarizes the activity in the allowance for doubtful accounts:
*
Primarily represents the effect of foreign currency fluctuations, as well as the acquisition of receivables for fiscal year 2003.
Inventories:
Inventories consist principally of hair care products held either for use in services or for sale. Inventories are stated at the lower of cost or
market with cost determined on a weighted average basis. Cost of product used and sold associated with the Company’s salon business are
determined by applying estimated gross profit margins to service and product revenues, which are based on historical factors including product
pricing trends and estimated shrinkage. In addition, the estimated gross profit margin is adjusted based on the results of physical inventory
counts performed at least semi-annually.
Cash and Cash Equivalents:
Cash equivalents consist of investments in short-
term, highly liquid securities having original maturities of three months or less, which are
made as a part of the Company’s cash management activity. The carrying values of these assets approximate their fair market values. The
Company primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash,
concentration accounts that funds are moved to, and several “zero balance”
disbursement accounts for funding of payroll and accounts payable.
As a result of the Company’s cash management system, checks issued, but not presented to the banks for payment, may create negative book
cash balances. Checks outstanding in excess of related book cash balances totaling approximately $10.1 and $9.1 million at June 30, 2005 and
2004, respectively, are included in accounts payable and accrued expenses within the Consolidated Balance Sheet.
65
For the Years Ended June 30,
2005
2004
2003
(Dollars in thousands)
Beginning balance
$
2,841
$
3,686
$
1,837
Bad debt expense
456
1,334
757
Write
-
offs
(316
)
(2,327
)
(479
)
Other*
483
148
1,571
Ending Balance
$
3,464
$
2,841
$
3,686