Dell 2005 Annual Report Download - page 46

Table of Contents
allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain.
Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and
subsequently recognized over the term of the contract or when the service is completed. Revenue from sales of third-party extended warranty
and service contracts, for which Dell is not obligated to perform, is recognized on a net basis at the time of sale.
Dell defers the cost of shipped products awaiting revenue recognition until the goods are delivered and revenue is recognized. In-transit product
shipments to customers totaled $420 million and $430 million as of February 3, 2006 and January 28, 2005, respectively, and are included in
other current assets on Dell's consolidated statement of financial position.
Warranty — Dell records warranty liabilities at the time of sale for the estimated costs that may be incurred under its limited warranty. The
specific warranty terms and conditions vary depending upon the product sold and country in which Dell does business, but generally includes
technical support, parts, and labor over a period ranging from 90 days to three years. Factors that affect Dell's warranty liability include the
number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to
satisfy Dell's warranty obligation. The anticipated rate of warranty claims is the primary factor impacting the estimated warranty obligation. The
other factors are less significant due to the fact that the average remaining aggregate warranty period of the covered installed base is
approximately 20 months, repair parts are generally already in stock or available at pre-determined prices, and labor rates are generally
arranged at pre-established amounts with service providers. Warranty claims are relatively predictable based on historical experience of failure
rates. If actual results differ from the estimates, Dell would adjust the estimated warranty liability. Each quarter, Dell reevaluates its estimates to
assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Shipping Costs — Dell's shipping and handling costs are included in cost of sales in the accompanying consolidated statement of income for all
periods presented.
Selling, General, and Administrative — Selling expenses include items such as sales commissions, marketing and advertising costs, and
contractor services. Advertising costs are expensed as incurred and were $773 million, $576 million, and $473 million during fiscal 2006, 2005,
and 2004, respectively. General and administrative expenses include items for Dell's administrative functions, such as Finance, Legal, Human
Resources, and information technology support. These functions include costs for items such as salaries, maintenance and supplies, insurance,
depreciation expense, and allowance for doubtful accounts.
Research, Development, and Engineering Costs — Research, development, and engineering costs are expensed as incurred, in accordance
with SFAS No. 2, Accounting for Research and Development Costs. Research, development, and engineering expenses primarily include
payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and
development support.
Website Development Costs — Dell expenses, as incurred, the costs of maintenance and minor enhancements to the features and functionality
of its websites.
Income Taxes — Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Comprehensive Income — Dell's comprehensive income is comprised of net income, foreign currency translation adjustments, unrealized gains
and losses on derivative financial instruments related to foreign currency hedging, and unrealized gains and losses on marketable securities
classified as available-for-sale. 43