Creative 2004 Annual Report Download - page 25

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the financial statements of Creative Technology Ltd and Creative’s subsidiaries under its
effective control from their respective dates of acquisition, after elimination of intercompany transactions and balances. The consolidated
financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”). The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those
estimates. Creative conducts a substantial portion of its business in United States dollars (“US$” or “$”). All dollar amounts included
in the financial statements and in the notes herein are United States dollars unless designated as Singapore dollars (“S$”). Creative’s
fiscal year-end is June 30. Creative generally operates on a thirteen week calendar closing on the Friday closest to the natural calendar
quarter. For convenience, all quarters are described by their natural calendar dates.
Foreign exchange
The functional currency of Creative and its subsidiaries is predominantly the US dollar and accordingly, gains and losses resulting from
the translation of monetary assets and liabilities denominated in currencies other than the US dollar are reflected in the determination
of net income (loss). Creative enters into forward exchange contracts to reduce its exposure to foreign exchange translation gains and
losses. Forward exchange contracts are marked to market each period and the resulting gains and losses are included in the determination
of net income or loss. No forward exchange contracts were outstanding at June 30, 2004. Included in interest and other expenses for
fiscal years 2004, 2003 and 2002 are exchange gains of $4.5 million, $5.4 million and $3.9 million, respectively.
At June 30, 2004, monetary assets and liabilities of Creative are denominated in the following currencies:
Approximate Percentage of $ Balance Denominated in:
US$ S$ EURO Other Currencies
Cash and cash equivalents 53 % 1 % 27 % 19 %
Accounts receivable, less allowances 69 % 1 % 13 % 17 %
Total current liabilities 73 % 14 % 5 % 8 %
Long-term obligations 30 % 70 % – –
The exchange rates for the S$ and Euro utilized in translating the balance sheet at June 30, 2004, expressed in US$ per one S$ and Euro
was 0.5830 and 1.2155, respectively.
Cash equivalents
Cash equivalents consist of highly liquid investment instruments with original or remaining maturities of three months or less at the time
of purchase. All deposits are in short term deposit and money market accounts with various banks. This diversification of risk is
consistent with Creative’s policy to maintain liquidity and ensure the safety of principal. Included in cash equivalents as of June 30, 2004
and 2003 are fixed rate deposits of $144.4 million and $188.2 million respectively.
At June 30, 2004, a total of $0.5 million in the fixed rate deposits was pledged to a bank to secure banking facilities for one of Creative’s
subsidiaries (see Note 5).
Fair value of financial instruments
For certain of Creative’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued expenses,
the carrying amounts approximate fair value due to their short maturities. The amounts shown for long term obligations also approximate
fair value because current interest rates charged to Creative for debts of similar maturities are substantially the same.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using standard cost, appropriately adjusted at balance sheet date
to approximate actual cost on a weighted average basis. In the case of finished products and work-in-progress, cost includes materials,
direct labor and an appropriate proportion of production overheads.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS