Course Project, Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements
Note 1
Business and Summary of Significant Accounting Principles (10 items)

Description of Business
The Open-Road Motorcycle Company is the largest online retailer of salvage title motorcycles. We are focused on bringing the customer the best value on entry level motorcycles by providing lower prices than our competitors. Our motorcycles are sold all over the United States, and we currently have 30 stores all across the country.

Property, Plant and Equipment
All property, plant and equipment are stated at cost and depreciated over their useful lives. All depreciation expense incurred is derived using the straight line method. We do not depreciate our land. We estimate our useful life for our assets accordingly; buildings have a 40 year life, computer equipment has a 5 year life and the repair equipment a 15 year life. The estimated lives of our assets are reviewed periodically to determine if any impairment is present so the useful lives and depreciation can be adjusted for accuracy.

Short-term Investments
All of our investments are comprised of trading securities comprised of debt instruments in different industries. The securities are reported at fair value with any unrealized gains and losses stated on net income. Securities that are still held at the end of the fiscal year are evaluated and are adjusted if necessary.

Inventory Valuation
All of our merchandise on our website is recorded at cost or fair value, whichever is lower. The salvage motorcycle inventory is recorded at cost. We value our inventory using the average method. If the motorcycle is considered “unsellable”, it becomes disassembled and sold for parts. All parts received from motorcycles that have been disassembled are not recorded because the cost has already been recorded from the original purchase. The motorcycle would be written off as a loss on net income and all sales from the parts are considered gains and are stated on net income. Refer to Note 2.

Costs of Goods Sold
Our Costs of goods sold is the cost of the motorcycles purchased, direct labor and depreciation expense. It includes all shipping and handling costs, air freight, train, and truck costs in received the merchandise and or motorcycles.

Revenue Recognition
All revenue generated from sales of inventory are realized when it has been earned. Generally when the item purchased arrives and the ownership transfers. All shipping and handling costs are included in the sales price. Revenues earned from sales are stated net of tax. Sales from disassembled motorcycles are listed as gains or losses on net income.

Advertising Costs
All costs associated with the marketing our website, which include television and internet ads, are expensed when incurred. Typically our advertising costs stay the same every year at $4 million, since our beginning in 2006.

Accounts Receivables
We record accounts receivables at net realizable value. This value is the remainder of the amount due on sales on credit less estimated uncollectable amounts. We calculate our estimated amount based on past write-offs. Our company credit policy extends a 30 day period in which the full payment is due upon completion of sale. The item must have a prepayment of at-least 50% of the motorcycle sales price before it is shipped. We believe that because of this policy the amount of uncollectable revenue is reduces and sales have increased.

Contingencies
Our company is currently involved in a lawsuit pending a settlement agreement. A former employee was injured in an accident involving improper handling of the shipment. The settlement is considered probable and the estimated cost is $2 million. This amount is stated in current liabilities. Refer to Note 4.

Pension and Other Postretirement Benefit Plans
Our company contributes to pension and other postretirement health care plans for all of our employees. We contribute 3% of gross wages into a...
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