Lowe's 2002 Annual Report Download - page 31

Note 1: Summary of significant
accounting policies.
The Company is the world’s second largest home improvement
retailer and operated 854 stores in 44 states at January 31, 2003.
The following are those accounting policies considered to be sig-
nificant by the Company.
Fiscal Year The Company’s fiscal year ends on the Friday
nearest January 31. The fiscal years ended January 31, 2003 and
February 1, 2002 had 52 weeks. The fiscal year ended February 2,
2001 had 53 weeks. All references herein for the years 2002, 2001
and 2000 represent the fiscal years ended January 31, 2003,
February 1, 2002 and February 2, 2001, respectively.
Principles of Consolidation The consolidated financial
statements include the accounts of the Company and its sub-
sidiaries, all of which are wholly owned. All material intercompa-
ny accounts and transactions have been eliminated.
Use of Estimates The preparation of the Company’s financial
statements in accordance with accounting principles generally
accepted in the United States of America requires management to
make estimates that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosures of contingent assets
and liabilities. The Company bases these estimates on historical
results and various other assumptions believed to be reasonable, the
results of which form the basis for making estimates concerning the
carrying values of assets and liabilities that are not readily available
from other sources. Actual results may differ from these estimates.
Cash and Cash Equivalents Cash and cash equivalents include
cash on hand, demand deposits and short-term investments with
original maturities of three months or less when purchased.
Investments The Company has a cash management program
which provides for the investment of cash balances, not expected
to be used in current operations, in financial instruments that have
maturities of up to 10 years. Investments, exclusive of cash equiv-
alents, with a maturity date of one year or less from the balance
sheet date or that are expected to be used in current operations, are
classified as short-term investments. All other investments are clas-
sified as long-term. Investments consist primarily of money mar-
ket preferred stocks, municipal obligations, agency bonds and cor-
porate notes.
The Company has classified all investment securities as avail-
able-for-sale, and they are carried at fair market value. Unrealized
gains and losses on such securities are included in accumulated
other comprehensive income in shareholders’ equity.
Derivative Financial Instruments The Company does not
use derivative financial instruments for trading purposes.
Accounts Receivable The majority of accounts receivable
arise from sales to commercial business customers. The allowance
for doubtful accounts is based on historical experience and a
review of existing receivables. The allowance for doubtful
accounts was $7.0 million at January 31, 2003 and $4.9 million
at February 1, 2002.
Sales generated through the Company’s private label credit
cards are not reflected in receivables. Under an agreement with
Monogram Credit Card Bank of Georgia (the Bank) and General
Electric Capital Financial (GECF), wholly owned subsidiaries of
General Electric Capital Corporation (GECC), consumer credit is
extended directly to customers by the Bank and GECF. All credit
program related services are performed and controlled directly by
the Bank and GECF. The Company has the option, but no obliga-
tion, at the end of the agreement to purchase the receivables. The
total portfolio of receivables held by GECC approximated $3.3 bil-
lion at January 31, 2003 and $2.9 billion at February 1, 2002.
Merchandise Inventory Inventory is stated at the lower of
cost or market using the first-in, first-out method of inventory
accounting. The cost of inventory also includes certain costs asso-
ciated with the preparation of inventory for resale.
The Company records an inventory reserve for the loss associ-
ated with selling discontinued inventories below cost. This reserve
is based on management’s current knowledge with respect to
inventory levels, sales trends and historical experience relating to
the liquidation of discontinued inventory. Management does not
believe the Company’s merchandise inventories are subject to sig-
nificant risk of obsolescence in the near-term, and management
has the ability to adjust purchasing practices based on anticipated
sales trends and general economic conditions. However, changes
in consumer purchasing patterns could result in the need for addi-
tional reserves. The Company also records an inventory reserve for
the estimated shrinkage between physical inventories. This reserve
is based primarily on actual shrink results from previous physical
inventories. Changes in actual shrink results from completed
physical inventories could result in revisions to previously esti-
mated shrink expense. Management believes it has sufficient cur-
rent and historical knowledge to record reasonable estimates for
both of these inventory reserves.
Property and Depreciation Property is recorded at cost.
Costs associated with major additions are capitalized and depreci-
ated. Capital assets are expected to yield future benefits, have use-
ful lives which exceed one year and have minimum acquisition cost
based on the type of asset involved. The total cost of a capital asset
generally includes all applicable sales taxes, delivery costs, installa-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2003, FEBRUARY 1, 2002 AND FEBRUARY 2, 2001