Lowe's 2013 Annual Report Download - page 44

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2014, FEBRUARY 1, 2013 AND FEBRUARY 3, 2012
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
1,832 stores in the United States, Canada and Mexico at January 31, 2014. Below are those accounting policies considered by
the Company to be significant.
Fiscal Year - The Company’s fiscal year ends on the Friday nearest the end of January. Fiscal years 2013 and 2012 each
contained 52 weeks, and fiscal year 2011 contained 53 weeks. All references herein for the years 2013, 2012 and 2011
represent the fiscal years ended January 31, 2014, February 1, 2013, and February 3, 2012, respectively.
Principles of Consolidation - The 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 - The functional currencies of the Company’s international subsidiaries are generally 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. The 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 - 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, sales 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, 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. The 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 - As of January 31, 2014, investments consisted primarily of money market funds, certificates of deposit,
municipal obligations, and municipal floating rate obligations. The Company classifies as investments restricted balances
primarily pledged as collateral for the Company’s extended protection plan program. 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. The Company’s trading securities are also classified as short-term
investments. All other investments are classified as long-term.
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 associated with the preparation of inventory for resale, including
distribution center costs, and is net of vendor funds.
The Company records an inventory reserve for the anticipated loss associated with selling inventories below cost. This 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. 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 the estimated shrink reserve
are made based on the timing and results of physical inventories.
The 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. Generally, these vendor funds do not represent the reimbursement of
specific, incremental and identifiable costs incurred by the Company to sell the vendor’s product. Therefore, the Company