Best Buy 2006 Annual Report Download - page 80

$ in millions, except per share amounts
66
Cost of Goods Sold and Selling, General and Administrative Expenses
The following table illustrates theprimary costs classified in each major expense category:
Cost of Goods Sold SG&A
•Total cost of products sold including:
—Freight expenses associated with moving merchandise
inventories from our vendors to our distribution
centers;
— Vendor allowances that are not a reimbursement of
specific, incremental and identifiable costs to promote
a vendor’s products;
— Cash discounts on payments to vendors;
• Cost of services provided;
• Physical inventory losses;
• Markdowns;
•Customer shipping and handlingexpenses;
•Costs associated with operating our distribution network,
including payroll and benefit costs, occupancy costs,
and depreciation; and
•Freight expenses associated with moving merchandise
inventories from our distribution centers to our retail
stores.
•Payroll and benefit costs for retail and corporate
employees;
•Occupancy costs of retail, services and corporate facilities;
•Depreciation related toretail, services andcorporate
assets;
• Advertising;
•Vendor allowances thatare a reimbursement of specific,
incremental and identifiable costs to promote avendor’s
products;
• Charitable contributions;
• Outsideservicefees;
•Long-lived asset impairment charges; and
•Other administrative costs, such as credit card service fees,
supplies, and travel and lodging.
Vendor Allowances
We receive vendor allowances for various programs,
primarily volume incentives and reimbursements for specific
costs such as markdowns, margin protection, advertising
and salesincentives.Vendor allowances provided as a
reimbursement of specific, incremental and identifiable
costs incurred to promote avendor’s products are included
as an expense reduction when the cost is incurred. All other
vendor allowances, includingvendor allowances received in
excess of our cost topromote a vendor’s product, are
initially deferred and recorded as a reduction of
merchandise inventories. The deferredamounts arethen
included as a reduction of cost of goods sold when the
related product is sold. Vendor allowances included in
revenue for reimbursement of sales incentives were $141,
$85 and $51, in fiscal 2006, 2005 and 2004, respectively.
Vendor allowances included in SG&A were $138, $140
and $92, in fiscal 2006, 2005 and 2004, respectively.
Advertising Costs
Advertising costs, which are included in SG&A, are
expensed the first time the advertisement runs. Advertising
costs consist primarily of print and television advertisements
as wellaspromotional events. Gross advertising expenses,
before expense reimbursement from vendor allowances, for
fiscal 2006, 2005 and2004 were $767, $712 and$675,
respectively.
Pre-Opening Costs
Non-capital expenditures associated with opening new
stores are expensed as incurred.
Stock-Based Compensation
SFAS No. 123(R)
On February 27, 2005, we early-adoptedthe fair value
recognition provisions of SFAS No. 123 (revised 2004),
Share-Based Payment (123(R)), requiring us to recognize