Eli Lilly 2005 Annual Report Download - page 36

FI NA NCI A L S
34
Notes to Consolidated Financial Statements
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Note 1: Summary of Significant Accounting Policies
Basis of presentation: The accompanying consolidated financial statements have been prepared in accordance
with accounting practices generally accepted in the United States (GAAP). The accounts of all wholly owned
and majority-owned subsidiaries are included in the consolidated financial statements. Where our ownership
of consolidated subsidiaries is less than 100 percent, the outside shareholders’ interests are reflected in other
noncurrent liabilities. All intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at
the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is,
based on the weighted-average number of outstanding common shares and the effect of all potentially dilutive
common shares (primarily unexercised stock options).
Cash equivalents: We consider all highly liquid investments, generally with a maturity of three months or less, to
be cash equivalents. The cost of these investments approximates fair value. If items meeting this definition are part
of a larger investment pool, they are classified consistent with the classification of the pool.
Inventories: We state all inventories at the lower of cost or market. We use the last-in, first-out (LIFO) method for
substantially all our inventories located in the continental United States, or approximately 49 percent of our total
inventories. Other inventories are valued by the first-in, first-out (FIFO) method. FIFO cost approximates current
replacement cost. Inventories at December 31 consisted of the following:
2005 2004
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 471.3 $ 717.5
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,272.4 1,356.3
Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214.7 305.7
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,958.4 2,379.5
Reduction to LIFO cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (80.4) (87.9)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,878.0 $2,291.6
Investments: Substantially all debt and marketable equity securities are classified as available-for-sale. Avail-
able-for-sale securities are carried at fair value with the unrealized gains and losses, net of tax, reported in other
comprehensive income. Unrealized losses considered to be other-than-temporary are recognized in earnings. Fac-
tors we consider in making this evaluation include company-specific drivers of the decrease in stock price, status
of projects in development, near-term prospects of the issuer, the length of time the value has been depressed, and
the financial condition of the industry. We do not evaluate cost-method investments for impairment unless there is
an indicator of impairment. We review these investments for indicators of impairment on a regular basis. Realized
gains and losses on sales of available-for-sale securities are computed based upon specific identification of the
initial cost adjusted for any other-than-temporary declines in fair value. Investments in companies over which we
have significant influence but not a controlling interest are accounted for using the equity method with our share of
earnings or losses reported in other income. We own no investments that are considered to be trading securities.
Derivative financial instruments: Our derivative activities are initiated within the guidelines of documented cor-
porate risk-management policies and do not create additional risk because gains and losses on derivative con-
tracts offset losses and gains on the assets, liabilities, and transactions being hedged. As derivative contracts are
initiated, we designate the instruments individually as either a fair value hedge or a cash flow hedge. Management
reviews the correlation and effectiveness of our derivatives on a quarterly basis.
For derivative contracts that are designated and qualify as fair value hedges, the derivative instrument is
marked to market with gains and losses recognized currently in income to offset the respective losses and gains
recognized on the underlying exposure. For derivative contracts that are designated and qualify as cash flow hedg-
es, the effective portion of gains and losses on these contracts is reported as a component of other comprehensive