Cisco 2005 Annual Report Download - page 41

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1. Description of Business
Cisco Systems, Inc. (the “Company” or “Cisco”) manufactures and sells networking and communications products and provides
services associated with that equipment and its use. The Company’s products are installed at corporations, public institutions,
telecommunication companies, and commercial businesses and are also found in personal residences. Cisco provides a broad line of
products for transporting data, voice, and video within buildings, across campuses, and around the world.
2. Summary of Significant Accounting Policies
Fiscal Year The Company’s fiscal year is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2005 and 2003 were 52-week
fiscal years, and fiscal 2004 was a 53-week fiscal year.
Principles of Consolidation The Consolidated Financial Statements include the accounts of Cisco Systems, Inc. and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original or remaining maturity of less
than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.
Investments The Company’s investments comprise U.S. government notes and bonds; corporate notes, bonds, and asset-backed
securities; municipal notes and bonds; and publicly traded equity securities. Investments with remaining maturities of less than one
year are considered to be short-term. These investments are held in the custody of several major financial institutions. The specific
identification method is used to determine the cost basis of fixed income securities disposed of. The weighted-average method is
used to determine the cost basis of publicly traded equity securities disposed of. At July 30, 2005 and July 31, 2004, the Company’s
investments were classified as available-for-sale. These investments are recorded in the Consolidated Balance Sheets at fair value.
Unrealized gains and losses on these investments, to the extent the investments are unhedged, are included as a separate component of
accumulated other comprehensive income, net of tax.
The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis are
judged to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge,
including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and
near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow
for any anticipated recovery in market value.
The Company also has investments in privately held companies. These investments are included in other assets in the
Consolidated Balance Sheets and are primarily carried at cost. The Company monitors these investments for impairment and makes
appropriate reductions in carrying values if the Company determines that an impairment charge is required based primarily on the
financial condition and near-term prospects of these companies.
Inventories Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual
cost, on a first-in, first-out basis. The Company provides 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 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.
Fair Value of Financial Instruments The fair value of certain of the Company’s financial instruments, including cash and cash equivalents,
accrued compensation, and other accrued liabilities, approximate cost because of their short maturities. The fair value of investments
is determined using quoted market prices for those securities or similar financial instruments.
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.
Notes to Consolidated Financial Statements