Policy

CHANGE IN ACCOUNTING PRINCIPLE

During the fourth quarter of 2013, we changed our method of accounting for motor fuel inventories in our Canada segment from the last-in, first-out (“LIFO”) method to the weighted-average cost method. We believe the newly adopted accounting principle is preferable under our circumstances because the weighted-average cost method of valuing inventories more closely matches actual costs to revenues. Wholesale motor fuel prices are extremely volatile and significant changes can occur daily. Our cost of sales under the LIFO method as compared to the weighted-average cost method is more volatile as LIFO captures the effects of rapid price changes on inventory and results in old inventory cost layers remaining in ending inventory that are not reflective of the actual cost of this inventory. We have made the decision that we will not transition away from the LIFO method for financial or tax reporting in our U.S. segment. Under the IRS conformity requirements, companies are required to use the LIFO method for financial reporting purposes if they use the LIFO method for tax reporting in the U.S. Therefore we will remain on the LIFO method for financial reporting purposes for our U.S. segment.

Comparative financial statements of prior years have been adjusted to apply the weighted-average cost method retrospectively. The following financial statement line items for fiscal years 2013, 2012 and 2011 were affected by the change in accounting principle (in millions):

Income Statements



	For the Year Ended December 31, 2013
	As Computed under LIFO			As Adjusted			Effect of Change
Operating revenues	$	12,777		$	12,777		$	—
Cost of sales	11,681			11,680			(1		)
Gross margin	1,096			1,097			1
Total operating expenses	859			859			—
Operating income	237			238			1
Other income, net	4			4			—
Interest expense	(27		)	(27		)	—
Income before income tax expense	214			215			1
Income tax expense	76			76			—
Net income	$	138		$	139		$	1



	For the Year Ended December 31, 2012
	As Computed under LIFO			As Adjusted			Effect of Change
Operating revenues	$	13,135		$	13,135		$	—
Cost of sales	12,000			12,002			2
Gross margin	1,135			1,133			(2		)
Total operating expenses	820			820			—
Operating income	315			313			(2		)
Other income, net	1			1			—
Interest expense	(1		)	(1		)	—
Income before income tax expense	315			313			(2		)
Income tax expense	105			105			—
Net income	$	210		$	208		$	(2	)



	For the Year Ended December 31, 2011
	As Computed under LIFO			As Adjusted			Effect of Change
Operating revenues	$	12,863		$	12,863		$	—
Cost of sales	11,735			11,730			(5		)
Gross margin	1,128			1,133			5
Total operating expenses	811			811			—
Operating income	317			322			5
Other income, net	1			1			—
Interest expense	(1		)	(1		)	—
Income before income tax expense	317			322			5
Income tax expense	103			104			(1		)
Net income	$	214		$	218		$	4

Balance Sheets



	December 31, 2013
	As Computed under LIFO		As Adjusted		Effect of Change
Inventories	$	186	$	217	$	31
Current deferred income tax asset	16		7		(9		)
Total assets	2,281		2,303		22

Stockholders’ equity:
Common stock	1		1		—
APIC	387		406		19
Retained earnings	86		87		1
AOCI	131		133		2
Total stockholders’ equity	$	605	$	627	$	22



	December 31, 2012
	As Computed under LIFO		As Adjusted		Effect of Change
Inventories	$	168	$	200	$	32
Current deferred income tax asset	13		4		(9		)
Total assets	1,709		1,732		23

Net investment:
Net investment	1,082		1,100		18
AOCI	165		170		5
Total net investment	$	1,247	$	1,270	$	23

As a result of the accounting change, net investment as of January 1, 2012 increased from $1,094 million, as originally reported using the LIFO method, to $1,114 million using the weighted-average cost method. There was no material change to other comprehensive income for any of the years ended December 31, 2013, 2012 or 2011.

Statements of Cash Flows



	For the Year Ended December 31, 2013
	As Computed under LIFO			As Adjusted			Effect of Change
Cash flows from operating activities:
Net income	$	138		$	139		$	1
Adjustments to reconcile net income to net cash provided by operating activities:
Changes in current assets and current liabilities	157			157			—
Deferred income tax expense	17			16			(1		)
Operating activities, net	128			128			—
Net cash provided by operating activities	440			440			—
Cash flows from investing activities:
Net cash used in investing activities	(206		)	(206		)	—
Cash flows from financing activities:
Net cash provided by financing activities	85			85			—
Effect of foreign exchange rate changes on cash	(2		)	(2		)	—
Net increase in cash	317			317			—
Cash at beginning of year	61			61			—
Cash at end of year	$	378		$	378		$	—



	For the Year Ended December 31, 2012
	As Computed under LIFO			As Adjusted			Effect of Change
Cash flows from operating activities:
Net income	$	210		$	208		$	(2	)
Adjustments to reconcile net income to net cash provided by operating activities:
Changes in current assets and current liabilities	42			43			1
Deferred income tax (benefit)	(2		)	(1		)	1
Operating activities, net	114			114			—
Net cash provided by operating activities	364			364			—
Cash flows from investing activities:
Net cash used in investing activities	(215		)	(215		)	—
Cash flows from financing activities:
Net cash used in financing activities	(220		)	(220		)	—
Effect of foreign exchange rate changes on cash	—			—			—
Net (decrease) in cash	(71		)	(71		)	—
Cash at beginning of year	132			132			—
Cash at end of year	$	61		$	61		$	—



	For the Year Ended December 31, 2011
	As Computed under LIFO			As Adjusted			Effect of Change
Cash flows from operating activities:
Net income	$	214		$	218		$	4
Adjustments to reconcile net income to net cash provided by operating activities:
Changes in current assets and current liabilities	(40		)	(44		)	(4		)
Deferred income tax expense	12			12			—
Operating activities, net	122			122			—
Net cash provided by operating activities	308			308			—
Cash flows from investing activities:
Net cash used in investing activities	(127		)	(127		)	—
Cash flows from financing activities:
Net cash used in financing activities	(151		)	(151		)	—
Effect of foreign exchange rate changes on cash	—			—			—
Net increase in cash	30			30			—
Cash at beginning of year	102			102			—
Cash at end of year	$	132		$	132		$	—

CST Brands, Inc. | 2013 | FY |

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