Best Buy 2007 Annual Report Download - page 59

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44
Critical Accounting Estimates
Our consolidated financial statements are prepared in
accordance with GAAP. In connection with the preparation
of our financial statements, we are required to make
assumptions and estimates about future events, and apply
judgments that affect the reported amounts of assets,
liabilities, revenue, expenses and the related disclosures.
We base our assumptions, estimates and judgments on
historical experience, current trends and other factors that
management believes to be relevant at the time our
consolidated financial statements are prepared. On a
regular basis, management reviews the accounting policies,
assumptions, estimates and judgments to ensure that our
financial statements are presented fairly and in accordance
with GAAP. However, because future events and their
effects cannot be determined with certainty, actual results
could differ from our assumptions and estimates, and such
differences could be material.
Our significant accounting policies are discussed in Note 1,
Summary of Significant Accounting Policies, of the Notes to
Consolidated Financial Statements, included in Item 8,
Financial Statements and Supplementary Data, of this
Annual Report on Form 10-K. Management believes that
the following accounting estimates are the most critical to
aid in fully understanding and evaluating our reported
financial results, and they require management’s most
difficult, subjective or complex judgments, resulting from the
need to make estimates about the effect of matters that are
inherently uncertain. Management has reviewed these
critical accounting estimates and related disclosures with
the Audit Committee of our Board.
Description Judgments and Uncertainties Effect if Actual Results Differ From
Assumptions
Inventory Reserves
We value our inventory at the lower of the
average cost of the inventory or fair market
value through the establishment of
markdown and inventory loss reserves.
Our markdown reserve represents the
excess of the carrying value, typically
average cost, over the amount we expect to
realize from the ultimate sale or other
disposal of the inventory. Markdowns
establish a new cost basis for our inventory.
Subsequent changes in facts or
circumstances do not result in the reversal of
previously recorded markdowns or an
increase in that newly established cost basis.
Our inventory loss reserve represents
anticipated physical inventory losses (e.g.,
theft) that have occurred since the last
physical inventory date. Independent
physical inventory counts are taken on a
regular basis to ensure the inventory
reported in our consolidated financial
statements is properly stated. During the
interim period between physical inventory
counts, we reserve for anticipated physical
inventory losses on a location-by-location
basis.
Our markdown reserve contains
uncertainties because the calculation
requires management to make assumptions
and to apply judgment regarding inventory
aging, forecasted consumer demand, the
promotional environment and technological
obsolescence.
Our inventory loss reserve contains
uncertainties because the calculation
requires management to make assumptions
and to apply judgment regarding a number
of factors, including historical results and
current inventory loss trends.
We have not made any material changes in
the accounting methodology used to
establish our markdown or inventory loss
reserves during the past three fiscal years.
We do not believe there is a reasonable
likelihood that there will be a material
change in the future estimates or
assumptions we use to calculate our
markdown reserve. However, if estimates
regarding consumer demand are inaccurate
or changes in technology affect demand for
certain products in an unforeseen manner,
we may be exposed to losses or gains that
could be material. A 10% difference in our
actual markdown reserve at March 3, 2007,
would have affected net earnings by
approximately $3 million in fiscal 2007.
We do not believe there is a reasonable
likelihood that there will be a material
change in the future estimates or
assumptions we use to calculate our
inventory loss reserve. However, if our
estimates regarding physical inventory losses
are inaccurate, we may be exposed to
losses or gains that could be material. A
10% difference in actual physical inventory
losses reserved for at March 3, 2007, would
have affected net earnings by approximately
$4 million in fiscal 2007.