Supercuts 2007 Annual Report Download - page 76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2007 and 2006, respectively, are included in accounts payable and accrued expenses within the Consolidated Balance Sheet.
Receivables and Allowance for Doubtful Accounts:
The receivable balance on the Company’s Consolidated Balance Sheet primarily includes accounts receivable from students of the beauty
schools, as well as accounts and notes receivable from franchisees. The balance is presented net of an allowance for expected losses (i.e.,
doubtful accounts), primarily related to receivables from beauty school students and the Company’s franchisees. The allowance for doubtful
accounts related to beauty school students is based on a historical analysis of delinquencies within the industry, segregated between active and
inactive students. Based on this analysis, the Company recorded an allowance for estimated uncollectible accounts, primarily related to inactive
accounts. Additionally, 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. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses related to existing accounts
and notes 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:
Inventories:
Inventories consist principally of hair care products held either for use in services or for sale. Cost of product used in salon services is
determined by applying estimated gross profit margins to service 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 and the monthly monitoring of factors that could impact our usage rates estimates. These factors include mix
of service sales, discounting and special promotions. Cost of product sold to salon customers is determined based on the weighted average cost
of product to the Company, adjusted for an estimated shrinkage factor. Product and service inventories are adjusted based on the results of
physical inventory counts performed at least semi-annually.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and
equipment are computed on the straight-line method over estimated useful asset lives (30 to 39 years for buildings and improvements and five
to ten years for equipment, furniture and software). Leasehold improvements are amortized over the shorter of their estimated useful lives or
the related lease term, generally ten years. For leases with renewal periods at the Company’s option, management may determine at the
inception of the lease that renewal is reasonably assured if failure to exercise a renewal option imposes an economic penalty to the Company.
In such cases,
75
For the Years Ended June 30,
2007
2006
2005
(Dollars in thousands)
Beginning balance
$
6,205
$
3,464
$
2,841
Bad debt expense
6,763
5,238
456
Write
-
offs
(7,345
)
(2,589
)
(316
)
Other (primarily the impact of foreign currency fluctuations)
776
92
483
Ending Balance
$
6,399
$
6,205
$
3,464