Eli Lilly 2007 Annual Report Download - page 35

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FINANCIALS
33
Notes to Consolidated Financial Statements
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Note 1: Summary of Signifi cant Accounting Policies
Basis of presentation: The accompanying consolidated fi nancial 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 fi nancial statements. Where our ownership of con-
solidated subsidiaries is less than 100 percent, the outside shareholders’ interests are refl ected in other noncur-
rent liabilities. All intercompany balances and transactions have been eliminated.
The preparation of fi nancial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclo-
sures at the date of the fi nancial 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 plus the effect of dilutive stock options and
other incremental shares.
Cash equivalents: We consider all highly liquid investments, with a maturity of three months or less, to be cash
equivalents. The cost of these investments approximates fair value. If items meeting this defi nition are part of a
larger investment pool, they are classifi ed consistent with the classifi cation of the pool.
Inventories: We state all inventories at the lower of cost or market. We use the last-in, fi rst-out (LIFO) method for
substantially all our inventories located in the continental United States, or approximately 39 percent of our total
inventories. Other inventories are valued by the fi rst-in, fi rst-out (FIFO) method. FIFO cost approximates current
replacement cost. Inventories at December 31 consisted of the following:
2007 2006
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 653.4 $ 644.5
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,803.0 1,551.5
Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202.7 187.0
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,659.1 2,383.0
Reduction to LIFO cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (135.4) (112.7)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,523.7 $2,270.3
Investments: Substantially all debt and marketable equity securities are classifi ed 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.
Factors we consider in making this evaluation include company-specifi c drivers of the decrease in stock price, sta-
tus of projects in development, near-term prospects of the issuer, the length of time the value has been depressed,
and the fi nancial 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 specifi c identifi ca-
tion of the initial cost adjusted for any other-than-temporary declines in fair value. Investments in companies over
which we have signifi cant infl uence but not a controlling interest are accounted for using the equity method with
our share of earnings or losses reported in other income—net. We own no investments that are considered to be
trading securities.
Risk-management instruments: O
ur derivative activities are initiated within the guidelines of documented corporate
risk-management policies and do not create additional risk because gains and losses on derivative contracts 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 fl ow 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