Cardinal Health 2008 Annual Report Download - page 79

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The Company believes the reserve maintained and expenses recorded in fiscal 2008 are appropriate and
consistent with historical methodologies employed. At this time, the Company is not aware of any internal
process or customer issues that might lead to a significant future increase in the Company’s allowance for
doubtful accounts as a percentage of net revenue.
See Schedule II included in this Form 10-K which includes a rollforward of activity for these allowance
reserves.
Inventories
A substantial portion of inventories (approximately 70% and 73% at June 30, 2008 and 2007, respectively)
are stated at the lower of cost, using the LIFO method, or market. These inventories are included within the core
distribution facilities within the Company’s Healthcare Supply Chain Services—Pharmaceutical segment (“core
distribution facilities”) and are primarily merchandise inventories. The LIFO impact on the consolidated
statement of earnings in a given year is dependent on pharmaceutical price appreciation and the level of
inventory. Prices for branded pharmaceuticals are primarily inflationary, which results in an increase in cost of
products sold, whereas prices for generic pharmaceuticals are deflationary, which results in a decrease in cost of
products sold.
Under the LIFO method, it is assumed that the most recent inventory purchases are the first items sold. As
such, the Company uses LIFO to better match current costs and revenue. Therefore, reductions in the overall
inventory levels resulting from declining branded pharmaceutical inventory levels generally will result in a
decrease in future cost of products sold, as the remaining inventory will be held at a lower cost due to the
inflationary environment. Conversely, reductions in the overall inventory levels created by declining generic
pharmaceutical inventory levels would generally increase future cost of products sold, as the remaining inventory
will be held at a higher cost due to the deflationary environment. The Company believes that the average cost
method of inventory valuation provides a reasonable approximation of the current cost of replacing inventory
within the core distribution facilities. As such, the LIFO reserve is the difference between (a) inventory at the
lower of LIFO cost or market and (b) inventory at replacement cost determined using the average cost method of
inventory valuation. In fiscal 2008 and 2007, the Company did not record any LIFO reserve reductions.
The remaining inventory is stated at the lower of cost, using the first-in, first-out (“FIFO”) method, or
market. If the Company had used the average cost method of inventory valuation for all inventory within the core
distribution facilities, inventories would not have changed in fiscal 2008 or fiscal 2007. In fact, primarily due to
continued deflation in generic pharmaceutical inventories, inventories at LIFO were $42.5 million and
$55.8 million higher than the average cost value as of June 30, 2008 and 2007, respectively. However, the
Company’s policy is not to record inventories in excess of its current market value.
Inventories recorded on the Company’s consolidated balance sheets are net of reserves for excess and
obsolete inventory which were $94.5 million and $95.8 million at June 30, 2008 and 2007, respectively. The
Company reserves for inventory obsolescence using estimates based on historical experiences, sales trends,
specific categories of inventory and age of on-hand inventory. If actual conditions are less favorable than the
Company’s assumptions, additional inventory reserves may be required, however these would not be expected to
have a material adverse impact on the Company’s consolidated financial statements.
Business Combinations
Assumptions and estimates are used in determining the fair value of assets acquired and liabilities assumed in
a business combination. A significant portion of the purchase price in many of the Company’s acquisitions is
assigned to intangible assets which requires management to use significant judgment in determining fair value. In
addition, current and future amortization expense for such intangibles is impacted by purchase price allocations as
well as the assessment of estimated useful lives of such intangibles, excluding goodwill. The Company believes
the assets recorded and the useful lives established are appropriate based upon current facts and circumstances.
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