Cabela's 2013 Annual Report Download - page 74

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Critical Accounting Policies and Use of Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America which requires management to make estimates and judgments that
affect amounts reported in the consolidated financial statements and accompanying notes. Management has
discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit
Committee of Cabela’s Board of Directors. While our estimates and assumptions are based on our knowledge of
current events and actions we may undertake in the future, actual results may ultimately differ from our estimates
and assumptions. Our estimation processes contain uncertainties because they require management to make
assumptions and apply judgment to make these estimates. Should actual results be different than our estimates, we
could be exposed to gains or losses from differences that may be material.
For a summary of our significant accounting policies, please refer to Note 1 “Nature of Business and
Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements. We believe
the accounting policies discussed below represent accounting policies we apply that are the most critical to
understanding our consolidated financial statements.
Merchandise Revenue Recognition
Revenue is recognized on our Direct sales when merchandise is delivered to the customer at the point of
delivery, with the point of delivery based on our estimate of shipping time from our distribution centers to the
customer. We recognize reserves for estimated product returns based upon our historical return experience and
expectations. Had our estimate of merchandise in-transit to customers and our estimate of product returns been
different by 10% at the end of 2013, our operating income would have been higher or lower by approximately
$0.9 million. Sales of gift instruments are recorded in merchandise revenue when the gift instruments are
redeemed in exchange for merchandise or services and as a liability prior to redemption. We recognize breakage
on gift instruments as revenue when the probability of redemption is remote. Had our estimate of breakage on
our recorded liability for gift instruments been different by 10% of the recorded liability at the end of 2013, our
merchandise revenue would have been higher or lower by approximately $0.7 million.
Inventories
We estimate provisions for inventory shrinkage, damaged goods returned values, and obsolete and slow-
moving items based on historical loss and product performance statistics and future merchandising objectives. Had
our estimated inventory reserves been different by 10% at the end of 2013, our cost of sales would have been higher
or lower by approximately $1.2 million.
Allowance for Loan Losses on Credit Cards
The allowance for loan losses represents management’s estimate of probable losses inherent in the credit card
loan portfolio. The allowance for loan losses is established through a charge to the provision for loan losses and is
evaluated by management for adequacy. Loans on a payment plan or non-accrual are segmented from the rest of
the credit card loan portfolio into a restructured credit card loan segment before establishing an allowance for loan
losses as these loans have a higher probability of loss. Management estimates losses inherent in the credit card
loans segment and restructured credit card loans segment based on a model which tracks historical loss experience
on delinquent accounts, bankruptcies, death, and charge-offs, net of estimated recoveries. The Financial Services
segment uses a migration analysis and historical bankruptcy and death rates to estimate the likelihood that a credit
card loan in the credit card loans segment will progress through the various stages of delinquency and to charge-
off. This analysis estimates the gross amount of principal that will be charged off over the next 12 months, net of
recoveries. The Financial Services segment uses historical charge-off rates to estimate the charge-offs over the
life of the restructured credit card loan, net of recoveries. This estimate is used to derive an estimated allowance
for loan losses. In addition to these methods of measurement, management also considers other factors such as
general economic and business conditions affecting key lending areas, credit concentration, changes in origination
and portfolio management, and credit quality trends. Since the evaluation of the inherent loss with respect to