Cisco 2007 Annual Report Download - page 46

2007 Annual Report 49
Notes to Consolidated Financial Statements
1. Basis of Presentation
The fiscal year for Cisco Systems, Inc. (the “Company” or “Cisco”) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2007,
2006, and 2005 were 52-week fiscal years. The Consolidated Financial Statements include the accounts of Cisco Systems, Inc. and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The Company conducts business globally and is primarily managed on a geographic basis in the following theaters: United States
and Canada; European Markets; Emerging Markets; Asia Pacific; and Japan. The Emerging Markets theater consists of Eastern Europe,
Latin America, the Middle East and Africa, and Russia and the Commonwealth of Independent States (CIS).
2. Summary of Significant Accounting Policies
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. 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 28, 2007 and
July 29, 2006, 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 is 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 write downs based on excess and obsolete inventories determined primarily
by future demand forecasts. The write down 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. In addition, the Company records a liability for firm, noncancelable, and
unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of the Company’s future demand
forecasts consistent with its valuation of excess and obsolete inventory.
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 values of investments and
the Company’s long-term debt are 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 with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate such risks by spreading its
risk across multiple counterparties and monitoring the risk profiles of these counterparties.
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 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 fulfill
supply requirements of the Company could materially impact future operating results.