CVS 2004 Annual Report Download - page 34
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²Significant accounting policies
Description of business–CVS Corporation (the “Company”)
is a leader in the retail drugstore industry in the United States.
The Company sells prescription drugs and a wide assortment
of general merchandise, including over-the-counter drugs, beauty
products and cosmetics, film and photofinishing services,
seasonal merchandise, greeting cards and convenience foods,
through its CVS/pharmacy®retail stores and online through
CVS.com.
®The Company also provides pharmacy benefit
management, mail order services and specialty pharmacy services
through PharmaCare Management Services and PharmaCare
Pharmacy®stores. As of January 1, 2005, the Company operated
5,375 retail and specialty pharmacy stores in 36 states and the
District of Columbia.
Basis of presentation–The consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany balances and transactions
have been eliminated.
Fiscal year–The Company’s fiscal year is a 52 or 53 week period
ending on the Saturday nearest to December 31. Fiscal 2004,
which ended on January 1, 2005, and fiscal 2002, which ended
on December 28, 2002, each included 52 weeks. Fiscal 2003,
which ended on January 3, 2004, included 53 weeks. Unless
otherwise noted, all references to years relate to these fiscal years.
Reclassifications–Certain reclassifications have been made
to the consolidated financial statements of prior years to
conform to the current year presentation. Most significantly,
the presentation of reporting cash flows was modified from
the indirect to the direct method of presentation, the preferred
presentation under Statement of Financial Accounting Standards
(“SFAS”) No. 95, “Statement of Cash Flows.”
Use of estimates–The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
Cash and cash equivalents–Cash and cash equivalents consist
of cash and temporary investments with maturities of three
months or less when purchased.
Accounts receivable–Accounts receivable are stated net of an
allowance for uncollectible accounts of $57.3 million and $58.4
million as of January 1, 2005 and January 3, 2004, respectively.
The balance primarily includes amounts due from third party
providers (e.g., pharmacy benefit managers, insurance companies
and governmental agencies) and vendors.
Fair value of financial instruments–As of January 1, 2005,
the Company’s financial instruments include cash and cash
equivalents, accounts receivable, accounts payable and short-term
debt. Due to the short-term nature of these instruments, the
Company’s carrying value approximates fair value. The carrying
amount of long-term debt was $1.9 billion and $1.1 billion, and
the estimated fair value was $1.9 billion and $1.1 billion as of
January 1, 2005 and January 3, 2004, respectively. The fair value
of long-term debt was estimated based on rates currently offered
to the Company for debt with similar maturities. The Company
had outstanding letters of credit, which guaranteed foreign
trade purchases, with a fair value of $7.8 million as of January 1,
2005, and $6.5 million as of January 3, 2004. The Company
also had outstanding letters of credit associated with insurance
programs with a fair value of $124.7 million as of January 1,
2005 and $65.5 million as of January 3, 2004. There were
no outstanding investments in derivative financial instruments
as of January 1, 2005 or January 3, 2004.
Inventories–Inventory is stated at the lower of cost or market on
a first-in, first-out basis using the retail method of accounting to
determine cost of sales and inventory in our stores and the cost
method of accounting to determine inventory in our distribution
centers. Independent physical inventory counts are taken on
a regular basis in each store and distribution center location
to ensure that the amounts reflected in the accompanying
consolidated financial statements are properly stated. During the
interim period between physical inventory counts, the Company
accrues for anticipated physical inventory losses on a location-
by-location basis based on historical results and current trends.
Property and equipment–Property, equipment and
improvements to leased premises are depreciated using the
straight-line method over the estimated useful lives of the assets,
or when applicable, the term of the lease, whichever is shorter.
Estimated useful lives generally range from 10 to 40 years for
buildings, building improvements and leasehold improvements
and 5 to 10 years for fixtures and equipment. Repair and
maintenance costs are charged directly to expense as incurred.
Major renewals or replacements that substantially extend the
useful life of an asset are capitalized and depreciated.
Notes to Consolidated Financial Statements
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