Eli Lilly 2008 Annual Report Download - page 38

FINANCIALS
36
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 disclosures 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 from the date
of purchase to be cash equivalents. The cost of these investments approximates fair value. Included in cash equiv-
alents at December 31, 2008, is restricted cash of $339.0 million related to the debt assumed with the ImClone
acquisition, which is expected to be paid in the fi rst quarter of 2009.
Inventories: We state all inventories at the lower of cost or market. We use the last-in, fi rst-out (LIFO) method for
the majority of our inventories located in the continental United States, or approximately 45 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:
2008 2007
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 771.0 $ 653.4
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,657.1 1,803.0
Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236.3 202.7
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,664.4 2,659.1
Reduction to LIFO cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (171.2) (135.4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,493.2 $2,523.7
Investments:
Substantially all of our investments in debt and marketable equity securities are classifi ed as avail-
able-for-sale. Available-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 fair value,
status 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 cation of the initial
cost adjusted for any other-than-temporary declines in fair value. Investments in companies over which we have sig-
nifi 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—net. We own no investments that are considered to be trading securities.
Risk-management 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 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 marked
to market with gains and losses recognized currently in income to offset the respective losses and gains recognized