Supercuts 2008 Annual Report Download - page 76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
$3.9 and $6.5 million at June 30, 2008 and 2007, 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 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 the Company's
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. 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 the Company's 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 three
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
74
For the Years Ended June 30,
2008
2007
2006
(Dollars in thousands)
Beginning balance
$
6,399
$
6,205
$
3,464
Bad debt expense
3,900
7,347
5,238
Write
-
offs
(8,784
)
(7,345
)
(2,589
)
Other (primarily the impact of foreign currency fluctuations)
—
192
92
Ending balance
$
1,515
$
6,399
$
6,205