updated 2/28/2006 4:56:43 PM ET 2006-02-28T21:56:43

Online closeout retailer Overstock.com Inc. said Tuesday it would restate previously reported financial results going back to 2002 to correct how it accounted for freight costs.

The accounting errors relate to how the Salt Lake City-based company immediately expensed inbound freight costs in the periods they were incurred, instead of capitalizing such costs as a part of inventory and expensing them as it sold off the inventory, it said. The accounting error affects annual financial reports for 2002, 2003 and 2004 and quarterly reports for 2004 and 2005.

The effect of the correction will lower the net loss reported in each affected annual period, Overstock.com said, while boosting inventory as of Sept. 30, 2005, by $3.5 million.

For 2005, the accounting change will narrow the reported net loss by $1.8 million for the quarter ended Sept. 30 and by $592,000 for the quarter ended June 30. It will widen the net loss by $107,000 for the quarter ended March 31.

For 2004, the correction will lower the full-year loss by $461,000. Broken down by quarter, profit for the quarter ended Dec. 31 will increase by $260,000, the net loss for the quarter ended Sept. 30 will be lowered by $103,000, the net loss for the quarter ended June 30 will be reduced by $141,000, and net loss for the quarter ended March 31 will increase by $43,000.

The accounting change will also reduce the net losses reported for the 2002 and 2003 fiscal years, Overstock.com said. The company said it will file amended quarterly reports for each of the first three quarters of 2005 as soon as practicable.

Overstock.com said the cumulative effect of the corrections for fiscal years before 2002 would lower its reported accumulated deficit and increase inventory by $239,000. However, those amounts may change as it completes restating previous periods’ results, it added.

Tuesday’s news of Overstock’s restatements comes amid a Securities and Exchange Commission investigation into allegations by Overstock that a research firm, Gradient Analytics, issued negative reports on the company in exchange for payments from a hedge fund seeking to profit from a drop in its stock price. Overstock has sued Gradient and the hedge fund in question, Rocker Partners; they deny any wrongdoing.

The SEC had issued subpoenas to two columnists for Dow Jones & Co., Herb Greenberg of MarketWatch and Carol Remond of Dow Jones Newswires, seeking documents related to Overstock. But the SEC is taking the unusual step of halting pursuit of the subpoenas until its five commissioners consider the issue of subpoenaing journalists, SEC Chairman Christopher Cox said Monday.

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