CVS 2011 Annual Report Download - page 41

CVS CAREMARK 39 2011 ANNUAL REPORT
Retail Pharmacy Segment
Our Retail Pharmacy segment recognizes revenue from the
sale of merchandise (other than prescription drugs) at the
time the merchandise is purchased by the retail customer.
We recognize revenue from the sale of prescription drugs at
the time the prescription is filled, which is or approximates
when the retail customer picks up the prescription. Customer
returns are not material. Revenue from the performance of
services in our health care clinics is recognized at the time
the services are performed.
We have not made any material changes in the way we
recognize revenue during the past three years.
VENDOR ALLOWANCES AND PURCHASE
DISCOUNTS
Pharmacy Services Segment
Our Pharmacy Services segment receives purchase dis-
counts on products purchased. Contractual arrangements
with vendors, including manufacturers, wholesalers and retail
pharmacies, normally provide for the Pharmacy Services
segment to receive purchase discounts from established
list prices in one, or a combination of, the following forms:
(i) a direct discount at the time of purchase, (ii) a discount
for the prompt payment of invoices or (iii) when products
are purchased indirectly from a manufacturer (e.g., through
a wholesaler or retail pharmacy), a discount (or rebate) paid
subsequent to dispensing. These rebates are recognized
when prescriptions are dispensed and are generally calcu-
lated and billed to manufacturers within 30 days of the end
of each completed quarter. Historically, the effect of adjust-
ments resulting from the reconciliation of rebates recognized
to the amounts billed and collected has not been mate-
rial to the results of operations. We account for the effect of
any such differences as a change in accounting estimate in
the period the reconciliation is completed. The Pharmacy
Services segment also receives additional discounts under
its wholesaler contract if it exceeds contractually defined
annual purchase volumes. In addition, the Pharmacy
Services segment receives fees from pharmaceutical manu-
facturers for administrative services. Purchase discounts
and administrative service fees are recorded as a reduction
of “Cost of revenues”.
Retail Pharmacy Segment
Vendor allowances received by the Retail Pharmacy seg-
ment reduce the carrying cost of inventory and are recog-
nized in cost of revenues when the related inventory is sold,
unless they are specifically identified as a reimbursement of
incremental costs for promotional programs and/or other ser-
vices provided. Amounts that are directly linked to advertising
commitments are recognized as a reduction of advertising
expense (included in operating expenses) when the related
advertising commitment is satisfied. Any such allowances
received in excess of the actual cost incurred also reduce the
carrying cost of inventory. The total value of any upfront pay-
ments received from vendors that are linked to purchase com-
mitments is initially deferred. The deferred amounts are then
amortized to reduce cost of revenues over the life of the con-
tract based upon purchase volume. The total value of any
upfront payments received from vendors that are not linked to
purchase commitments is also initially deferred. The deferred
amounts are then amortized to reduce cost of revenues on a
straight-line basis over the life of the related contract.
We have not made any material changes in the way we
account for vendor allowances and purchase discounts
during the past three years.
INVENTORY
Our 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 CVS/phar-
macy stores, weighted average cost to determine cost of
sales and inventory in our mail service and specialty phar-
macies and the cost method of accounting on a first-in, first-
out basis to determine inventory in our distribution centers.
Under the retail method, inventory is stated at cost, which
is determined by applying a cost-to-retail ratio to the end-
ing retail value of our inventory. Since the retail value of our
inventory is adjusted on a regular basis to reflect current mar-
ket conditions, our carrying value should approximate the
lower of cost or market. In addition, we reduce the value of
our ending inventory for estimated inventory losses that have
occurred during the interim period between physical inven-
tory counts. Physical inventory counts are taken on a regu-
lar basis in each store and a continuous cycle count process
is the primary procedure used to validate the inventory bal-
ances on hand in each distribution center and mail facility
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