Cisco 2006 Annual Report Download - page 45

48 Cisco Systems, Inc.
Fair Value of Financial Instruments The fair value of certain of the Company’s nancial instruments, including cash and cash equivalents,
accrued compensation, and other accrued liabilities, approximate cost because of their short maturities. The fair values of investments and
the Company’s long-term debt are determined using quoted market prices for those securities or similar nancial instruments.
Concentrations of Risk Cash and cash equivalents are maintained with several nancial 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
nancial 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 nancing transactions, does not
require collateral from its customers. The Company’s customers are primarily in the enterprise, service provider and commercial 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 fulll
supply requirements of the Company could materially impact future operating results.
Revenue Recognition The Company’s products are generally integrated with software that is essential to the functionality of the equipment.
Additionally, the Company provides unspecied software upgrades and enhancements related to the equipment through its maintenance
contracts for most of its products. Accordingly, the Company accounts for revenue in accordance with Statement of Position No. 97-2, “Software
Revenue Recognition,” and all related interpretations. For sales of products where software is incidental to the equipment, the Company
applies the provisions of Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” and Staff Accounting Bulletin
No. 104, “Revenue Recognition,” and all related interpretations.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is xed or
determinable, and collectibility is reasonably assured. In instances where nal acceptance of the product, system, or solution is specied
by the customer, revenue is deferred until all acceptance criteria have been met. Technical support services revenue is deferred and
recognized ratably over the period during which the services are to be performed, which is typically from one to three years. Advanced
services revenue is recognized upon delivery or completion of performance.
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 systems 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, the
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 nancing services to its customers to build, maintain, and upgrade their networks.
Lease receivables primarily represent the principal balance remaining in sales-type and direct-nancing 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 years 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 ve years
for furniture and xtures. Estimated useful lives of up to ve years are used for production, engineering, and other equipment. Depreciation
of operating lease assets is computed based on the respective lease terms, which generally range up to three years. Depreciation and
amortization of leasehold improvements are computed using the shorter of the remaining lease terms or ve years.
Notes to Consolidated Financial Statements