Proctor and Gamble 2007 Annual Report Download - page 56

Millions of dollars except per share amounts or as otherwise specied.
The Procter & Gamble Company
54
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NOTE 1


The Procter & Gamble Company’s (the “Company,” “we” or “us”)
business is focused on providing branded consumer goods products
of superior quality and value. Our products are sold in more than
180 countries primarily through retail operations including mass
merchandisers, grocery stores, membership club stores, drug stores
and high-frequency stores. We have on-the-ground operations in
over 80 countries.

The Consolidated Financial Statements include The Procter & Gamble
Company and its controlled subsidiaries. Intercompany transactions
are eliminated.

Preparation of nancial statements in conformity with accounting
principles generally accepted in the United States of America (U.S. GAAP)
requires management to make estimates and assumptions that affect
the amounts reported in the Consolidated Financial Statements and
accompanying disclosures. These estimates are based on management’s
best knowledge of current events and actions the Company may
undertake in the future. Estimates are used in accounting for, among
other items, consumer and trade promotion accruals, pensions, post-
employment benets, stock options, valuation of acquired intangible
assets, useful lives for depreciation and amortization, future cash
ows associated with impairment testing for goodwill, indenite-lived
intangible assets and long-lived assets, deferred tax assets, potential
income tax assessments and contingencies. Actual results may ultimately
differ from estimates, although management does not believe such
differences would materially affect the nancial statements in any
individual year.

Sales are recognized when revenue is realized or realizable and has
been earned. Most revenue transactions represent sales of inventory.
The revenue recorded is presented net of sales and other taxes we
collect on behalf of governmental authorities and includes shipping
and handling costs, which generally are included in the list price to the
customer. Our policy is to recognize revenue when title to the product,
ownership and risk of loss transfer to the customer, which can be on
the date of shipment or the date of receipt by the customer. A provision
for payment discounts and product return allowances is recorded as a
reduction of sales in the same period that the revenue is recognized.
Trade promotions, consisting primarily of customer pricing allowances,
merchandising funds and consumer coupons, are offered through
various programs to customers and consumers. Sales are recorded net
of trade promotion spending, which is recognized as incurred, generally
at the time of the sale. Most of these arrangements have terms of
approximately one year. Accruals for expected payouts under these
programs are included as accrued marketing and promotion in the
accrued and other liabilities line item in the Consolidated Balance Sheets.

Cost of products sold is primarily comprised of direct materials and
supplies consumed in the manufacture of product, as well as
manufacturing labor, depreciation expense and direct overhead expense
necessary to acquire and convert the purchased materials and supplies
into nished product. Cost of products sold also includes the cost to
distribute products to customers, inbound freight costs, internal
transfer costs, warehousing costs and other shipping and handling
activity.

Selling, general and administrative (SG&A) expense is primarily
comprised of marketing expenses, selling expenses, research and
development costs, administrative and other indirect overhead costs,
depreciation and amortization expense on non-manufacturing assets
and other miscellaneous operating items. Research and development
costs are charged to expense as incurred and were $2,112 in 2007,
$2,075 in 2006, and $1,940 in 2005. Advertising costs, charged to
expense as incurred, include worldwide television, print, radio,
Internet and in-store advertising expenses and were $7,937 in 2007,
$7,122 in 2006, and $5,929 in 2005. The composition of amounts
included in advertising costs have been changed for the current
and historical periods to reect evolving advertising strategies.
Non-advertising related components of the Company’s total marketing
spending include costs associated with consumer promotions,
product sampling and sales aids, all of which are included in SG&A
expense, as well as coupons and customer trade funds, which are
recorded as reductions to net sales.
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Other non-operating income, net primarily includes divestiture gains
and interest and investment income.

Financial statements of operating subsidiaries outside the United States
of America (U.S.) generally are measured using the local currency as
the functional currency. Adjustments to translate those statements into
U.S. dollars are recorded in other comprehensive income. Currency
translation adjustments in accumulated other comprehensive income
were gains of $2,941 and $522 at June 30, 2007 and 2006, respectively.
For subsidiaries operating in highly inationary economies, the U.S.
dollar is the functional currency. Remeasurement adjustments for
nancial statements in highly inationary economies and other
transactional exchange gains and losses are reected in earnings.

The Statement of Cash Flows is prepared using the indirect method,
which reconciles net earnings to cash ow from operating activities.
These adjustments include the removal of timing differences between
the occurrence of operating receipts and payments and their recognition
in net earnings. The adjustments also remove cash ows from operating
activities arising from investing and nancing activities, which are
presented separately from operating activities. Cash ows from foreign
currency transactions and operations are translated at an average
exchange rate for the period. Cash ows from hedging activities are