CVS 2009 Annual Report Download - page 54

Notes to Consolidated Financial Statements
These investments are classified within Level 1 of the fair value
hierarchy because they are valued using quoted market prices.
Short-term investments. The Company’s short-term invest-
ments consist of certificate of deposits with initial maturities
of greater than three months when purchased. These invest-
ments, which were classified as available-for-sale within Level 1
of the fair value hierarchy, were carried at historical cost, which
approximated fair value at December 31, 2009. The Company
had no short-term investments at December 31, 2008.
Fair value of financial instruments. As of December 31,
2009, the Company’s financial instruments include cash and
cash equivalents, accounts receivable, accounts payable,
short-term debt and current portion of short-term debt. Due
to the short-term nature of these instruments, the Company’s
carrying value approximates fair value. The carrying amount
and estimated fair value of long-term debt was $8.6 billion
and $8.8 billion, respectively, as of December 31, 2009. The
fair value of long-term debt was estimated based on rates
currently offered to the Company for debt with similar terms
and maturities. The Company had outstanding letters of credit,
which guaranteed foreign trade purchases, with a fair value of
$9 million and $7 million as of December 31, 2009 and 2008,
respectively. There were no outstanding investments in deriva-
tive financial instruments as of December 31, 2009 and 2008.
Accounts receivable. Accounts receivable are stated net
of an allowance for doubtful accounts of $272 million and
$189 million as of December 31, 2009 and 2008, respectively.
The balance primarily includes amounts due from third-party
providers (e.g., pharmacy benefit managers, insurance compa-
nies and governmental agencies) and vendors as well as clients,
members and manufacturers.
Inventories. Inventories are 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
CVS/pharmacy stores, average cost to determine cost of sales
and inventory in our mail service and specialty pharmacies
and the cost method of accounting to determine inventory in
our distribution centers. Physical inventory counts are taken
on a regular basis in each store and a continuous cycle count
process is the primary procedure used to validate the inven-
tory balances on hand in each distribution center 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.
Following is a summary of the impact of the fiscal year change:
Fiscal Fiscal Period
Fiscal Year Year-End Fiscal Period Includes
2009 December 31, 2009 January 1, 2009 - 365 days
December 31, 2009
2008 December 31, 2008 December 30, 2007 - 368 days
December 31, 2008
2007 December 29, 2007 December 31, 2006 - 364 days
December 29, 2007
Unless otherwise noted, all references to years relate to the
above fiscal years.
Reclassifications. Certain reclassifications have been made
to the 2008 and 2007 consolidated financial statements to
conform to the current year presentation.
Use of estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in
the United States of America 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.
Fair Value Hierarchy. The Company utilizes the three-level
valuation hierarchy for the recognition and disclosure of fair
value measurements. The categorization of assets and liabilities
within this hierarchy is based upon the lowest level of input
that is significant to the measurement of fair value. The three
levels of the hierarchy consist of the following:
• Level 1 – Inputs to the valuation methodology are unad-
justed quoted prices in active markets for identical assets or
liabilities that the Company has the ability to access at the
measurement date.
• Level 2 – Inputs to the valuation methodology are quoted
prices for similar assets and liabilities in active markets,
quoted prices in markets that are not active or inputs that
are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the instrument.
• Level 3 – Inputs to the valuation methodology are unobserv-
able inputs based upon management’s best estimate of inputs
market participants could use in pricing the asset or liability
at the measurement date, including assumptions about risk.
Cash and cash equivalents. Cash and cash equivalents consist
of cash and temporary investments with maturities of three
months or less when purchased. The Company invests in
short-term money market funds, commercial paper, time
deposits, as well as other available-for-sale debt securities that
are classified as cash and cash equivalents within the accom-
panying consolidated balance sheets, as these funds are highly
liquid and readily convertible to known amounts of cash.
CVS Caremark
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