Cisco 2003 Annual Report Download - page 21

A reserve for sales returns is established based on historical trends in product return rates. The reserve for sales returns as of
July 26, 2003 and July 27, 2002 included $73 million and $113 million, respectively, for estimated future returns that were recorded
as a reduction of our accounts receivable. If the actual future returns were to deviate from the historical data on which the reserve
had been established, our revenue could be adversely affected.
Allowance for Inventory
Our inventory balance was $873 million as of July 26, 2003, compared with $880 million as of July 27, 2002. Our inventory allowances
as of July 26, 2003 were $122 million, compared with $226 million as of July 27, 2002. We provide inventory allowances based on
excess and obsolete inventories determined primarily by future demand forecasts. The allowance is measured as the difference between
the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is
a component of our cost of sales. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and
subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Our provision for inventory was $70 million, $131 million, and $2.1 billion for fiscal 2003, 2002, and 2001, respectively. If there
were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence
because of rapidly changing technology and customer requirements, we could be required to increase our inventory allowances and
our gross margin could be adversely affected. Inventory management remains an area of focus as we balance the need to maintain
strategic inventory levels to ensure competitive lead times versus the risk of inventory obsolescence because of rapidly changing technology
and customer requirements.
Warranty Costs
The liability for product warranties, included as other accrued liabilities, was $246 million as of July 26, 2003, compared with
$242 million as of July 27, 2002. (See Note 8 to the Consolidated Financial Statements.) Our products sold are generally covered by
a warranty for periods of 90 days, one year, or five years, and for some products, we provide a limited lifetime warranty. We accrue
for warranty costs as part of our cost of sales based on associated material costs and technical support labor costs. Material cost is
primarily estimated based upon historical trends in the volume of product returns within the warranty period and the cost to repair
or replace the equipment. Technical support labor cost is primarily estimated based upon historical trends in the rate of customer
calls and the cost to support the customer calls within the warranty period.
The provision for warranties issued during fiscal 2003 and 2002 was $342 million and $443 million, respectively. If we experience
an increase in warranty claims compared with our historical experience, or if costs of servicing warranty claims are greater than the
expectations on which the accrual has been based, our gross margin could be adversely affected.
Investment Impairments
Our publicly traded equity investments are reflected on the Consolidated Balance Sheets as of July 26, 2003 at a fair value of $745 million,
compared with $567 million as of July 27, 2002. (See Note 7 to the Consolidated Financial Statements.) We recognize an impairment charge
when the decline in the fair value of our publicly traded equity investments below their cost basis is judged to be other-than-temporary.
The ultimate value realized on these equity investments is subject to market price volatility until they are sold. We consider various
factors in determining whether we should recognize an impairment charge, including, but not limited to, the length of time and
extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the company, and
our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Our
ongoing consideration of these factors could result in additional impairment charges in the future, which could adversely affect our
net income. During the first quarter of fiscal 2003 and 2002, we recognized a charge of $412 million and $858 million, respectively,
attributable to the impairment of certain publicly traded equity securities.
We also have investments in privately held companies, many of which can still be considered to be in the startup or development
stages. As of July 26, 2003, our investments in privately held companies were $516 million, compared with $477 million as of
July 27, 2002, and were included in other assets. (See Note 5 to the Consolidated Financial Statements.) We monitor these investments
for impairment and make appropriate reductions in carrying values if we determine an impairment charge is required based primarily
on the financial condition and near-term prospects of these companies. These investments are inherently risky, as the markets for the
technologies or products these companies are developing are typically in the early stages and may never materialize. Our impairment
charges on investments in privately held companies were $281 million and $420 million during fiscal 2003 and 2002, respectively.
2003 ANNUAL REPORT 19