Cardinal Health 2010 Annual Report Download - page 59

Reserve methodologies are assessed annually based on historical losses and economic, business and market
trends. In addition, reserves are reviewed quarterly and updated if appropriate. We may adjust the allowance for
doubtful accounts if changes in customers’ financial condition or general economic conditions make default
s
more fre
q
uent or severe.
T
h
e
f
o
ll
ow
i
ng ta
bl
eg
i
ves
i
n
f
ormat
i
on regar
di
ng t
h
ea
ll
owance
f
or
d
ou
b
t
f
u
l
accounts over t
h
e past t
h
ree
fi
sca
l
years.
Fi
scal
y
ear
e
nded June
30,
All
owa
n
ce
f
or
d
oubt
f
ul account
s
(
in millions
)
Allowance as
a percenta
g
e
of
custome
r
rece
i
vables
A
ll
owa
n
ce as
a percen
t
age
o
f
revenue
Reduct
i
on t
o
a
ll
owa
n
ce
f
o
r
cus
t
o
m
e
r
d
educt
i
ons an
d
write-offs
(
in millions
)
Add
i
t
i
on to Allowanc
e
(
in millions
)
2010 $140.1 2.6% 0.14% $ 8.5 $26.8
2009 $117.6 2.2% 0.12% $48.3 $51.4
2008 $113.9 2.5% 0.13% $19.4 $19.9
A
hypothetical 0.1% increase or decrease in the reserve as a percentage of trade receivables, sales-type
leases and finance notes receivables at June 30, 2010, would result in an increase or decrease in bad debt ex
p
ens
e
o
f approximately
$
5.3 million.
We
b
e
li
eve t
h
e reserve ma
i
nta
i
ne
d
an
d
expenses recor
d
e
di
n
fi
sca
l
2010 are appropr
i
ate. At t
hi
st
i
me, we ar
e
not aware o
f
any ana
l
yt
i
ca
lfi
n
di
ngs or customer
i
ssues t
h
at m
i
g
h
t
l
ea
d
to a s
i
gn
ifi
cant
f
uture
i
ncrease
i
nt
he
a
ll
owance
f
or
d
ou
b
t
f
u
l
accounts as a percentage o
f
net revenue
.
Inventorie
s
A
substantial
p
ortion of inventories (73% at June 30, 2010, and 74% at June 30, 2009) is stated at the lowe
r
o
f cost, using the LIFO (“last in, first out”) method, or market. These are primarily merchandise inventories a
t
the core pharmaceutical distribution facilities within our Pharmaceutical segment. The LIFO impact on the
consolidated statements of earnings in a given year depends on pharmaceutical price appreciation and the level o
f
inventory. Prices for branded pharmaceuticals tend to rise, which results in an increase in cost of products sold
,
whereas prices for generic pharmaceuticals tend to decline, which results in a decrease in cost of products sold
.
T
h
e LIFO met
h
o
d
presumes t
h
at t
h
e most recent
i
nventory purc
h
ases are t
h
e
fi
rst
i
tems so
ld
, so LIFO
h
e
l
ps
us
b
etter matc
h
current costs an
d
revenue. Us
i
ng LIFO,
if b
ran
d
e
d
p
h
armaceut
i
ca
li
nventory
l
eve
l
s
d
ec
li
ne, t
h
e
r
esu
l
t genera
ll
yw
ill b
ea
d
ecrease
i
n
f
uture cost o
f
pro
d
ucts so
ld
:pr
i
ces
f
or
b
ran
d
e
d
p
h
armaceut
i
ca
l
s ten
d
to r
i
se
o
ver t
i
me, so our o
ld
er
i
nventory
i
s
h
e
ld
at a
l
ower cost. Converse
l
y,
if
gener
i
cp
h
armaceut
i
ca
li
nventory
l
eve
l
s
d
ec
li
ne,
f
uture cost o
f
pro
d
ucts so
ld
genera
ll
yw
ill i
ncrease: pr
i
ces
f
or gener
i
cp
h
armaceut
i
ca
l
s ten
d
to
d
ec
li
ne
o
ver t
i
me, so our o
ld
er
i
nventory
i
s
h
e
ld
at a
hi
g
h
er cost. We
b
e
li
eve t
h
at t
h
e average cost met
h
o
d
o
fi
nventory
va
l
uat
i
on reasona
bl
y approx
i
mates t
h
e current cost o
f
rep
l
ac
i
ng
i
nventory w
i
t
hi
nt
h
eP
h
armaceut
i
ca
ldi
str
ib
ut
i
o
n
f
ac
ili
t
i
es. Accor
di
ng
l
y, t
h
e LIFO reserve
i
st
h
e
diff
erence
b
etween (a)
i
nventory at t
h
e
l
ower o
f
LIFO cost o
r
mar
k
et an
d
(
b
)
i
nventory at rep
l
acement cost
d
eterm
i
ne
d
us
i
ng t
h
e average cost met
h
o
d
o
fi
nventory va
l
uat
i
on
.
In
fi
sca
l
2010 an
d
2009, we
did
not recor
d
any LIFO reserve re
d
uct
i
ons
.
T
h
e rema
i
n
i
n
gi
nventor
yi
s state
d
at t
h
e
l
ower o
f
cost, us
i
n
g
t
h
e FIFO (“
fi
rst
i
n,
fi
rst out”) met
h
o
d
,or
mar
k
et
.
I
f we had used the average cost method of inventory valuation for all inventory within the Pharmaceutica
l
distribution facilities, the value of inventories would not have changed in fiscal 2010 or fiscal 2009. In fact,
p
rimarily because prices for our generic pharmaceutical inventories have continued to decline, inventories at
LIFO were
$
37.7 million and
$
34.9 million higher than the average cost value as of June 30, 2010, and 2009,
r
espectively. However, we do not record inventories in excess of current market value
.
33