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H O N  I N D U S T R I E S  I n c .  a n d  S U B S I D I A R I E S
costs are included in selling and administrative expense. Rebates, 
discounts, and other marketing program expenses directly related to 
the sale are recorded as a reduction to net sales. Marketing program 
accruals require the use of management estimates and the consider -
ation of contractual arrangements subject to interpretation. Customer 
sales that reach certain award levels can affect the amount of such 
estimates, and actual results could differ from these estimates. Future 
market conditions may require increased incentive offerings, possibly 
resulting in an incremental reduction in net sales at the time the 
incentive is offered.
Allowance for doubtful accounts receivable  – The allowance 
for receivables is based on several factors including overall customer 
credit quality, historical write-off experience, and specific account 
analysis that project the ultimate collectibility of the account. As such, 
these factors may change over time, causing the reserve level to adjust 
accordingly. 
When it is determined that a customer is unlikely to pay, a 
charge is recorded to bad debt expense in the income statement and the 
allowance for doubtful accounts is increased. When it becomes certain 
the customer cannot pay, the receivable is written off by removing the 
accounts receivable amount and reducing the allowance for doubtful 
accounts accordingly.
At January 3, 2004, there was approximately $192 million in 
outstanding accounts receivable and $11 million recorded in the allow-
ance for doubtful accounts to cover all potential future customer 
non-payments. However, if economic conditions deteriorate signifi -
cantly or one of our large customers were to declare bankruptcy, a 
larger allowance for doubtful accounts might be necessary. The 
allowance for doubtful accounts was approximately $10 million and 
$17 million at year end 2002 and 2001, respectively.
Inventory valuation – The Company values 96% of its inventory by 
the last-in, first-out (LIFO) method. Additionally, the Company evalu-
ates inventory reserves in terms of excess and obsolete exposure. This 
evaluation includes such factors as anticipated usage, inventory turn -
over, inventory levels, and ultimate product sales value. As such, these 
factors may change over time, causing the reserve level to adjust 
accordingly. 
Long-lived assets – Long-lived assets are reviewed for impairment 
as events or changes in circumstances occur indicating that the amount 
of the asset reflected in the Company’s balance sheet may not be recov-
erable. An estimate of undiscounted cash flows produced by the asset, 
or the appropriate group of assets, is compared to the carrying value to 
determine whether impairment exists. The estimates of future cash 
flows involve considerable management judgment and are based upon 
assumptions about future operating performance. The actual cash flows 
could differ from management’s estimates due to changes in business 
conditions, operating performance, and economic conditions. Asset 
impairment charges associated with the Company’s restructuring 
activities are discussed in the Restructuring Related Charges note.
The Company’s continuous focus on improving the manufac-
turing process tends to increase the likelihood of assets being replaced; 
therefore, the Company is constantly evaluating the expected useful 
lives of its equipment, which can result in accelerated depreciation. 
Additionally, the Company recorded losses on the disposal of assets in 
the amount of $1 million and $5 million in 2003 and 2002, respec -
tively, as a result of its rapid continuous improvement initiatives.
Goodwill and other intangibles  – In accordance with the 
Statement of Financial Accounting Standards (“SFAS”) No. 142, the 
Company evaluates its goodwill for impairment on an annual basis 
based on values at the end of third quarter or whenever indicators of