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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 2009 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, 2009, trade and notes receivables were $7,029 million prior to allowances of $152 million. In
2009, 2008 and 2007 our provision for bad debts was $29 million, $41 million and $24 million. At March 31, 2009
and 2008, the allowance as a percentage of trade and notes receivables was 2.2% and 2.5%. An increase or decrease
of 0.1% in the 2009 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 in this Annual Report on Form 10-K.
Inventories: We state inventories at the lower of cost or market (“LCM.”) 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 is determined on the last-in, first-out (“LIFO”) method and Canadian inventories are
stated using the first-in, first-out (“FIFO”) method. Technology Solutions segment inventories consist of computer
hardware with cost determined by the standard cost method. Rebates, fees, cash discounts, allowances, chargebacks
and other incentives received from vendors are generally accounted for as a reduction in the cost of inventory and
are recognized when the inventory is sold. Total inventories were $8.5 billion and $9.0 billion at March 31, 2009
and 2008.
The LIFO method was used to value approximately 88% of our inventories at March 31, 2009 and 2008. At
March 31, 2009 and 2008, our LIFO reserves, net of LCM adjustments (discussed below), were $85 million and $77
million. LIFO reserves include both pharmaceutical and non-pharmaceutical products. In 2009, 2008 and 2007, we
recognized net LIFO expense of $8 million and net LIFO credits of $14 million and $64 million within our
consolidated statements of operations. A LIFO expense is recognized when the net effect of price increases on
branded pharmaceuticals and non-pharmaceutical products held in inventory exceeds the impact of price declines
and shifts towards generic pharmaceutical products, including the effect of branded pharmaceutical products that
have lost market exclusivity. A LIFO credit is recognized when the impact of price declines and shifts towards
generic pharmaceutical products exceeds the impact of price increases on branded pharmaceuticals and non-
pharmaceutical products held in inventory. In 2009, our $8 million net LIFO expense related to our non-
pharmaceutical products.
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 $107 million and $43 million higher than FIFO as of March 31, 2009 and 2008. As a
result, in 2009 and 2008, we recorded LCM charges of $64 million and $43 million within our consolidated
statements of operations to adjust our LIFO inventories to market. As deflation in generic pharmaceuticals
continues, we anticipate that LIFO credits from our pharmaceutical products will be fully offset by LCM reserves.
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. We provide reserves for excess and obsolete inventory, if indicated as a result of
these reviews. These factors could make our estimates of inventory valuation differ from actual results.