Avon 2001 Annual Report Download - page 26

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recognized. Contracts that require net-cash settlement and
contracts that give the counterparty a choice of net-cash
settlement or settlement in shares are recorded as assets or
liabilities and are initially measured at fair value with sub-
sequent changes in fair value recognized as gains or losses
in the income statement. At December 31, 2002, Avon
did not hold any forward contracts to purchase Avon com-
mon stock.
Research and Development > Research and development
costs are expensed as incurred and aggregated in
2002–$48.4 (2001–$45.9; 2000–$43.1).
Advertising > Advertising costs are expensed as incurred
and aggregated in 2002–$101.0 (2001–$97.2;
2000–$92.4). Direct response advertising costs, consist-
ing primarily of brochure preparation, are amortized
over the period during which the benefits are expected.
At December 31, 2002 and 2001, Prepaid expenses and
other included deferred brochure costs of $25.0 and
$26.4, respectively.
Income Taxes > Deferred income taxes have been provided
on items recognized for financial reporting purposes in
different periods than for income tax purposes at future
enacted rates. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items
will either expire before Avon is able to realize their bene-
fit, or that future deductibility is uncertain.
U.S. income taxes have not been provided on
approximately $444.4 of undistributed income of sub-
sidiaries that has been or is intended to be permanently
reinvested outside the United States.
Shipping and Handling > Shipping and handling costs
are expensed as incurred and aggregated in 2002–$544.6
(2001–$538.0; 2000–$517.4). Shipping and handling
costs are included in Marketing, distribution and adminis-
trative expenses on the Consolidated Statements of
Income.
Contingencies > In accordance with FAS No. 5,
“Accounting for Contingencies,” Avon determines whether
to disclose and accrue for loss contingencies based on an
assessment of whether the risk of loss is remote, reasonably
possible or probable. Avon records loss contingencies when
it is probable that a liability has been incurred and the
amount of loss is reasonably estimable.
Reclassifications > To conform to the 2002 presentation,
certain reclassifications were made to the prior years’
Consolidated Financial Statements and the accompanying
footnotes.
Earnings per Share > Basic earnings per share (“EPS”)
are computed by dividing net income by the weighted-
average number of shares outstanding during the year.
Diluted EPS are calculated to give effect to all potentially
dilutive common shares that were outstanding during
the year.
For each of the three years ended December 31,
the components of basic and diluted earnings per share
were as follows:
2002 2001 2000
Numerator:
Basic:
Income from continuing
operations before cumulative
effect of accounting changes $534.6 $444.9 $485.8
Cumulative effect of
accounting changes —(0.3) (6.7)
Net income $534.6 $444.6 $479.1
Diluted:
Income from continuing
operations before cumulative
effect of accounting changes $534.6 $444.9 $485.8
Interest expense on
Convertible Notes, net of taxes 10.4 10.0 4.5
Income for purposes of
computing diluted EPS before
cumulative effect of
accounting changes 545.0 454.9 490.3
Cumulative effect of
accounting changes —(0.3) (6.7)
Net income for purposes
of computing diluted EPS $545.0 $454.6 $483.6
Denominator:
Basic EPS weighted-average
shares outstanding 236.06 236.83 237.67
Dilutive effect of:
Assumed conversion of
stock options and settlement
of forward contracts 2.45* 2.26* 2.06*
Assumed conversion of
Convertible Notes 6.96 6.96 3.22
Diluted EPS adjusted
weighted-average shares
outstanding 245.47 246.05 242.95
Basic EPS:
Continuing operations $ 2.26 $ 1.88 $ 2.04
Cumulative effect of
accounting changes —— (.03)
$ 2.26 $ 1.88 $ 2.01
Diluted EPS:
Continuing operations $ 2.22 $ 1.85 $ 2.02
Cumulative effect of
accounting changes —— (.03)
$ 2.22 $ 1.85 $ 1.99
* At December 31, 2002, 2001 and 2000, stock options and forward
contracts to purchase Avon common stock totaling 2.8 million shares,
.3 million shares and 1.1 million shares, respectively, are not included
in the diluted EPS calculation since their impact is anti-dilutive.