Lowe's 2009 Annual Report Download - page 36

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended January 29, 2010, January 30, 2009 and February 1, 2008
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 1,710 stores
in the United States and Canada at January 29, 2010. Below are those
accounting policies considered by the Company to be significant.
Fiscal Year – e Company’s fiscal year ends on the Friday nearest
the end of January. Each of the fiscal years presented contained 52 weeks.
All references herein for the years 2009, 2008 and 2007 represent the
fiscal years ended January 29, 2010, January 30, 2009, and February 1,
2008, respectively.
Principles of Consolidation – e consolidated financial statements
include the accounts of the Company and its wholly-owned or
controlled operating subsidiaries. All intercompany accounts and
transactions have been eliminated.
Foreign Currency – e functional currencies of the Company’s
international subsidiaries are primarily the local currencies of the
countries in which the subsidiaries are located. Foreign currency
denominated assets and liabilities are translated into U.S. dollars
using the exchange rates in effect at the consolidated balance sheet
date. Results of operations and cash flows are translated using
the average exchange rates throughout the period. e effect of
exchange rate fluctuations on translation of assets and liabilities is
included as a component of shareholders’ equity in accumulated
other comprehensive income (loss). Gains and losses from foreign
currency transactions, which are included in selling, general and
administrative (SG&A) expense, have not been significant.
Use of Estimates – e 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, 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
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. Cash and
cash equivalents are carried at amortized cost on the consolidated balance
sheets. e majority of payments due from financial institutions for
the settlement of credit card and debit card transactions process within
two business days and are, therefore, classified 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 financial instruments that have maturities
of up to 10 years. Variable-rate demand notes, which have stated
maturity dates in excess of 10 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 or par
value put 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 classified as short-term investments.
e Company’s trading securities are also classified as short-term
investments. All other investments are classified as long-term. As of
January 29, 2010, investments consisted primarily of municipal bonds,
money market funds, mutual funds, tax-exempt commercial paper,
and certificates of deposit. 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 classified as investments.
e Company maintains investment securities in conjunction
with certain employee benefit plans that are classified as trading
securities. ese securities are carried at fair market value with unrealized
gains and losses included in SG&A expense. All other investment
securities are classified as available-for-sale and are carried at fair
market value with unrealized gains and losses included in accumulated
other comprehensive income (loss) in shareholders’ equity.
Merchandise Inventory – Inventory is stated at the lower of cost
or market using the first-in, first-out method of inventory accounting.
e cost of inventory also includes certain costs associated with the
preparation of inventory for resale, including distribution center costs,
and is net of vendor funds.
e Company records an inventory reserve for the anticipated 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 significant 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 timing and results of physical inventories.
e Company receives funds from vendors in the normal course
of business, principally as a result of purchase volumes, sales, early
payments or promotions of vendors’ products, which generally do not
represent the reimbursement of specific, incremental and identifiable
costs incurred by the Company to sell the vendor’s product. ese funds
are treated as a reduction in the cost of inventory as the amounts are
accrued, and are recognized as a reduction of cost of sales when the
inventory is sold. e Company develops accrual rates for vendor funds
based on the provisions of the agreements in place. Due to the complexity
and diversity of the individual vendor agreements, the Company
performs analyses and reviews historical trends throughout the year
and confirms actual amounts with select vendors to ensure the amounts
earned are appropriately recorded. Amounts accrued throughout the year
could be impacted if actual purchase volumes differ from projected
annual purchase volumes, especially in the case of programs that provide
for increased funding when graduated purchase volumes are met.