Lowe's 2006 Annual Report Download - page 36

32
Lowe’s 2006 Annual Report
Note 1 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Lowe’s Companies, Inc. and subsidiaries (the Company) is the world’s second-
largest home improvement retailer and operated 1,385 stores in 49 states
at February 2, 2007. Below are those accounting policies considered to be
signicant by the Company.
Fiscal Year – e Company’s scal year ends on the Friday nearest the
end of January. e scal years ended February 2, 2007 and January 28, 2005
had 52 weeks. e scal year ended February 3, 2006 had 53 weeks. All
references herein for the years 2006, 2005 and 2004 represent the scal years
ended February 2, 2007, February 3, 2006 and January 28, 2005, respectively.
Stock Split – e Company’s Board of Directors approved a 2-for-1
stock split of its common shares on May 25, 2006. On June 30, 2006, share-
holders received one additional common share for each common share
held as of the record date of June 16, 2006. e par value of the Company’s
common stock remained at $0.50 per share. e par value of the additional
shares issued to eect the stock split totaling $384 million was reclassied
from Capital in Excess of Par Value to Common Stock on the Company’s
consolidated balance sheet. All prior period common share and per
common share amounts presented herein have been adjusted to reect
the 2-for-1 stock split.
Principles of Consolidation – e consolidated nancial statements
include the accounts of the Company and its wholly-owned or controlled
operating subsidiaries. All material intercompany accounts and transac-
tions have been eliminated.
Use of Estimates – e preparation of the Company’s nancial state-
ments in accordance with accounting principles generally accepted in the
United States of America requires management to make estimates that
aect the reported amounts of assets, liabilities, sales and expenses and
related disclosures of contingent assets and liabilities. e Company bases
these estimates on historical results and various other assumptions believed
to be reasonable, all of which form the basis for making estimates concern-
ing the carrying values of assets and liabilities that are not readily available
from other sources. Actual results may dier from these estimates.
Cash and Cash Equivalents – Cash and cash equivalents include
cash on hand, demand deposits and short-term investments with origi-
nal maturities of three months or less when purchased. e majority of
payments due from nancial institutions for the settlement of credit card
and debit card transactions process within two business days, and are
therefore classied as cash and cash equivalents.
Investments – e Company has a cash management program which
provides for the investment of cash balances not expected to be used in
current operations in nancial instruments that have maturities of up to
10 years. Variable rate demand notes and auction rate securities, which
have stated maturity dates of up to 30 years, meet this maturity requirement
of the cash management program because the maturity date of these
investments is determined based on the interest rate reset date for the
purpose of applying this criteria.
Investments, exclusive of cash equivalents, with a stated maturity date
of one year or less from the balance sheet date or that are expected to be
used in current operations, are classied as short-term investments. All
other investments are classied as long-term. Investments consist primarily
of certicates of deposit, time deposits, U.S. dollar foreign government
securities, money market preferred stocks, municipal obligations, agency
bonds, corporate notes and bonds, auction rate securities and money market
mutual funds. Restricted balances pledged as collateral for letters of credit
for the Company’s extended warranty program and for a portion of the
Company’s casualty insurance and installed sales program liabilities are
also classied as investments.
e Company has classied all investment securities as available-
for-sale, and they are carried at fair market value. Unrealized gains and
losses on such securities are included in accumulated other comprehen-
sive income in shareholders’ equity.
Merchandise Inventory – Inventory is stated at the lower of cost or
market using the rst-in, rst-out method of inventory accounting. e
cost of inventory also includes certain costs associated with the preparation
of inventory for resale and distribution center costs, net of vendor funds.
e Company records an inventory reserve for the loss associated with
selling inventories below cost. is reserve is based on management’s current
knowledge with respect to inventory levels, sales trends and historical
experience. Management does not believe the Company’s merchandise
inventories are subject to signicant 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
additional reserves. e Company also records an inventory reserve for
the estimated shrinkage between physical inventories. is reserve is based
primarily on actual shrink results from previous physical inventories.
Changes in the estimated shrink reserve may be necessary based on the
results of physical inventories. Management believes it has sucient
current and historical knowledge to record reasonable estimates for
both of these inventory reserves.
Derivative Financial Instruments – e Company occasionally
utilizes derivative nancial instruments to manage certain business risks.
However, the amounts were not material to the Company’s consolidated
nancial statements in any of the years presented. e Company does
not use derivative nancial instruments for trading purposes.
Accounts Receivable – e majority of the Company’s accounts
receivable arises from sales of goods and services to Commercial Business
Customers. In May 2004, the Company entered into an agreement with
General Electric Company and its subsidiaries (GE) to sell its then-exist-
ing portfolio of commercial business accounts receivable to GE. During
the term of the agreement, which ends on December 31, 2009, unless
terminated sooner by the parties, GE also purchases at face value new
commercial business accounts receivable originated by the Company
and services these accounts. e Company accounts for these transfers
as sales of accounts receivable. When the Company sells its commercial
business accounts receivable, it retains certain interests in those receiv-
ables, including the funding of a loss reserve and its obligation related to
GE’s ongoing servicing of the receivables sold. Any gain or loss on the
sale is determined based on the previous carrying amounts of the trans-
ferred assets allocated at fair value between the receivables sold and the
interests retained. Fair value is based on the present value of expected
future cash ows taking into account the key assumptions of anticipated
credit losses, payment rates, late fee rates, GE’s servicing costs and the
discount rate commensurate with the uncertainty involved. Due to the
short-term nature of the receivables sold, changes to the key assumptions
would not materially impact the recorded gain or loss on the sales of
receivables or the fair value of the retained interests in the receivables.
Total commercial business accounts receivable sold to GE were
$1.8 billion in 2006, $1.7 billion in 2005 and $1.2 billion in 2004. During
2006, 2005 and 2004, the Company recognized losses of $35 million,
$41 million and $34 million, respectively, on these sales as selling, general
and administrative (SG&A) expense, which primarily relates to the fair value
of the obligations incurred related to servicing costs that are remitted to
GE monthly. At February 2, 2007 and February 3, 2006, the fair value of
the retained interests was insignicant and was determined based on the
present value of expected future cash ows.
Notes to Consolidated Financial Statements
YEARS ENDED FEBRUARY 2, 2007, FEBRUARY 3, 2006 AND JANUARY 28, 2005