NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) The Company’s cash and cash equivalents consists of deposits with commercial banks. While Applied monitors the creditworthiness  of these commercial banks and institutions, a crisis in the U.S., Canadian or Mexican financial systems could limit access to funds  and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the  Company upon demand.  The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company  estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial  estimate is adjusted based on recent trends of customers and industries estimated to be greater credit risks, trends within the entire  customer pool and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it  becomes evident collection will not occur. While the Company has a large customer base that is geographically dispersed, a general  economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults,  and therefore, the need to revise estimates for bad debts.  Inventories are valued at the lower of cost or market, using the last-in, first-out (LIFO) method for U.S. inventories and the average  cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S.  inventories in fiscal 1974. At June 30, 2012, approximately 37% of the Company’s domestic inventory dollars relate to LIFO layers  added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power  transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined  consistently year-to-year.  The Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the  recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the  physical condition of the inventory as well as assumptions regarding future demand. The Company’s ability to recover its cost for  slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and  relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to  obsolescence and are eligible for return under various supplier return programs.  The Company enters into agreements with certain suppliers providing for inventory purchase incentives. The Company’s inventory  purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s  fiscal year end or the supplier’s year end. Incentives are received in the form of cash or credits against purchases upon attainment of  specified purchase volumes and are received monthly, quarterly or annually. The incentives are generally a specified percentage of  the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease  based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based  upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases  expected during the life of the program. Supplier programs are analyzed each quarter to determine the appropriateness of the  amount of purchase incentives accrued. Upon program completion, differences between estimates and actual incentives  subsequently received have not been material. Benefits under these supplier purchasing programs are recognized under the  Company’s LIFO inventory accounting method as a reduction of cost of sales when the inventories representing these purchases are  recorded as cost of sales. Accrued incentives expected to be settled as a credit against purchases are reported on the consolidated  balance sheet as an offset to amounts due to the related supplier.  Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives  of the assets and is included in selling, distribution and administrative expenses in the accompanying statements of consolidated  income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease  if a shorter period, and equipment is depreciated over three to eight years. The Company capitalizes internal use software  development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use. Amortization of software begins when it is ready for its intended use, and is amortized on a straight-line basis over the estimated  useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on  the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes  in circumstances indicate that the recorded value cannot be recovered from undiscounted future cash flows. Impairment losses, if  any, would be measured based upon the difference between the carrying amount and the fair value of the assets.  Property and Related Depreciation and Amortization  Supplier Purchasing Programs  Inventories  Allowances for Doubtful Accounts  20 Applied Industrial Technologies, Inc. and Subsidiaries