3Ware 2005 Annual Report Download - page 70

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
mortgage-backed and asset back securities, preferred stocks and closed-end bond funds. The Company accounts
for its short term investments under Statement of Financial Accounting Standard (“SFAS”) No. 115, “Accounting
for Certain Investments in Debt and Equity Securities.” Management determines the appropriate classification of
such securities at the time of purchase and re-evaluates such classification as of each balance sheet date. The
investments which are classified as available-for-sale are adjusted to market value at each period end with the
offsetting unrealized gain or loss reflected as a separate component of stockholders’ equity, net of tax. These
investments are adjusted for amortization of premiums and discounts to maturity and such amortization is
included in interest income. Realized gains and losses and declines in value judged to be other than temporary
are determined based on the specific identification method and are reported in the consolidated statements of
operations.
Strategic Equity Investments
The Company enters into certain equity investments for the promotion of business and strategic objectives.
These investments are valued at historical cost less any recognized impairments. The Company’s policy requires
that these investments are periodically reviewed for impairments that are judged to be other than temporary. If
the Company determines that the investment is impaired, the Company records an unrealized loss which
permanently reduces the cost basis of the investments. These unrealized losses are included in other income
(expense), net on the consolidated statements of operations.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities. The Company believes all of the
financial instruments’ recorded values approximate current values because of their nature and respective
durations.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist
principally of available-for-sale securities and trade receivables. The Company believes that the credit risk in its
trade receivables is mitigated by the Company’s credit evaluation process, relatively short collection terms and
dispersion of its customer base. The Company generally does not require collateral and losses on trade
receivables have historically been within management’s expectations.
The Company invests its excess cash in debt instruments of the U.S. Treasury, corporate bonds, mortgage-
backed securities, asset-backed securities, preferred stocks, and closed-end bond funds primarily with investment
grade credit ratings. The Company has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates. The Company has not experienced any significant losses on its
short-term investments.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Lower of cost
or market adjustments reduce the carrying value of the related inventory and take into consideration reductions in
sales prices, excess inventory levels and obsolete inventory. These adjustments are generally done on a part-by-
part basis. Once established, these adjustments are considered permanent and are not reversed until the related
inventory is sold or disposed. From time to time, the Company has established general inventory reserves to
cover non-part specific inventory exposure, such as products built without a firm purchase order.
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