Cisco 2004 Annual Report Download - page 40

Concentrations of Risk Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed
the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with
financial institutions of reputable credit and therefore bear minimal credit risk.
The Company performs ongoing credit evaluations of its customers and, with the exception of certain financing transactions, does
not require collateral from its customers. The Company’s customers are primarily in the service provider and enterprise markets. The
Company receives certain of its components from sole suppliers. Additionally, the Company relies on a limited number of contract
manufacturers and suppliers to provide manufacturing services for its products. The inability of a contract manufacturer or supplier
to fulfill supply requirements of the Company could materially impact future operating results.
Revenue Recognition The Company’s networking and communications products are integrated with software that is essential to the
functionality of the equipment. Additionally, the Company provides unspecified software upgrades and enhancements related to the
equipment through its maintenance contracts. Accordingly, the Company accounts for revenue in accordance with Statement of
Position No. 97-2, “Software Revenue Recognition,” and all related interpretations.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectibility is reasonably assured. In instances where final acceptance of the product, system, or solution is specified
by the customer, revenue is deferred until all acceptance criteria have been met. Service revenue is generally deferred and, in most cases,
recognized ratably over the period during which the services are to be performed, which is typically from one to three years.
When a sale involves multiple elements, such as sales of products that include services, the entire fee from the arrangement is
allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element
are met. Fair value for each element is established based on the sales price charged when the same element is sold separately.
The Company uses distributors that stock inventory and typically sell to system integrators, service providers, and other resellers.
In addition, certain products are sold through retail partners. The Company refers to these sales through distributors and retail
partners as its two-tier system of sales to the end customer. Revenue from distributors and retail partners is recognized based on a
sell-through method using information provided by them. Distributors and retail partners participate in various cooperative marketing
and other programs, and the Company maintains estimated accruals and allowances for these programs. The Company accrues for
warranty costs, sales returns, and other allowances based on its historical experience.
Allowance for Doubtful Accounts The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer
accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the
accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.
Lease Receivables The Company provides a variety of lease financing services to its customers to build, maintain, and upgrade their
networks. Lease receivables primarily represent the principal balance remaining in sales-type and direct-financing leases under these
programs, net of allowances. These leases typically have two- to three-year terms and are usually collateralized by a security interest
in the underlying assets.
Advertising Costs The Company expenses all advertising costs as incurred, and the amounts were not material for all periods presented.
Software Development Costs Software development costs required to be capitalized pursuant to Statement of Financial Accounting
Standards No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,” have not been
material to date. Software development costs for internal use required to be capitalized pursuant to Statement of Position No. 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” have also not been material to date.
Depreciation and Amortization Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation
and amortization are computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of
25 years are used for buildings. Estimated useful lives of 30 to 36 months are used for computer equipment and related software and
five years for furniture and fixtures. Estimated useful lives of up to five years are used for production, engineering, and other equipment.
Depreciation of operating lease assets is computed based on the respective lease terms, which range up to three years. Depreciation
and amortization of leasehold improvements are computed using the shorter of the remaining lease terms or five years.
2004 ANNUAL REPORT 43