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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
41
Reserve methodologies are assessed annually based on historical losses and economic, business and market
trends. In addition, reserves are reviewed quarterly and updated if unusual circumstances or trends are present. We
believe the reserves maintained and expenses recorded in 2008 are appropriate and consistent with historical
methodologies employed. At this time, we are not aware of any internal process or customer issues that might lead
to a significant future increase in our allowance for doubtful accounts as a percentage of net revenue.
At March 31, 2008, trade and notes receivables were $6,536 million, and other customer financing was $120
million, prior to allowances of $163 million. In 2008, 2007 and 2006 our provision for bad debts was $41 million,
$24 million and $26 million. At March 31, 2008 and 2007, the allowance as a percentage of trade and notes
receivables was 2.5% and 2.6%. An increase or decrease of 0.1% in the 2008 allowance as a percentage of trade and
notes receivables would result in an increase or decrease in the provision on receivables of approximately $7
million. Additional information concerning our allowance for doubtful accounts may be found in Schedule II
included this Annual Report on Form 10-K.
Inventories: Inventories for our Distribution Solutions segment consist of merchandise held for resale. For our
Distribution Solutions segment, the majority of the cost of domestic inventories was determined on the LIFO
method and international inventories are stated using the first-in, first-out (“FIFO”) method. Technology Solutions’
inventories consist of computer hardware with cost determined by the standard cost method. Total inventories were
$9.0 billion and $8.2 billion at March 31, 2008 and 2007.
The LIFO method was used to value approximately 88% of our inventories at March 31, 2008 and 2007. At
March 31, 2008 and 2007, our LIFO reserves were $34 million and $92 million. LIFO reserves include both
pharmaceutical and non-pharmaceutical products. In 2008, 2007 and 2006, we recognized $14 million, $64 million
and $32 million of LIFO credits within our statements of operations. LIFO adjustments generally represent the net
effect of the amount of price increases on branded pharmaceutical products held in inventory offset by price declines
on generic pharmaceutical products, including the price decrease effect of branded pharmaceutical products that
have lost patent protection. A LIFO benefit implies that the price declines on generic pharmaceutical products,
including the effect of branded pharmaceuticals that have lost patent protection, exceeded the effect of price
increases on branded pharmaceutical products held in inventory.
Our policy is to record inventories at the lower of cost or market (“LCM”). We believe that the FIFO inventory
costing method provides a reasonable estimation of the current cost of replacing inventory (i.e., “market”). As such,
our LIFO inventory is valued at the lower of LIFO, or inventory as valued under FIFO. Primarily due to continued
deflation in generic pharmaceutical inventories, pharmaceutical inventories at LIFO were $43 million higher than
FIFO as of March 31, 2008. As a result, we recorded a $43 million LCM reserve in 2008 to adjust our LIFO
inventories to market. As deflation in generic pharmaceuticals continues, we anticipate that LIFO benefits on our
pharmaceutical products will be fully offset by a LCM reserve.
In determining whether inventory valuation issues exist, we consider various factors including estimated
quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and
forecasted sales. Shifts in market trends and conditions, changes in customer preferences due to the introduction of
generic drugs or new pharmaceutical products or the loss of one or more significant customers are factors that could
affect the value of our inventories. These factors could make our estimates of inventory valuation differ from actual
results.