McKesson 2006 Annual Report Download - page 63

McKESSON CORPORATION
FINANCIAL NOTES
Nature of Operations: The consolidated financial statements of McKesson Corporation (“McKesson,” the “Company,” or “we” and other
similar pronouns) include the financial statements of all majority-owned or controlled companies. Significant intercompany transactions and
balances have been eliminated. The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a
particular year shall mean the Company’s fiscal year.
We conduct our business through three segments. Through our Pharmaceutical Solutions segment, we are a leading distributor of ethical and
proprietary drugs, and health and beauty care products throughout North America. This segment also manufactures and sells automated
pharmaceutical dispensing systems for retail pharmacies, and provides medical management and specialty pharmaceutical solutions for biotech
and pharmaceutical manufacturers, patient and other services for payors, and software, and consulting and outsourcing services to pharmacies.
Our Medical-Surgical Solutions segment distributes medical-surgical supplies, first-aid products and equipment, and provides logistics and
other services within the United States and Canada. Our Provider Technologies segment delivers enterprise-wide patient care, clinical,
financial, supply chain, managed care and strategic management software solutions, automated pharmaceutical dispensing systems for
hospitals, as well as outsourcing and other services, to healthcare organizations throughout North America, the United Kingdom and other
European countries.
Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation including the reclassification
of certain customer incentives in our consolidated statements of operations. Customer incentives of $345 million and $246 million for 2005 and
2004 were previously included in cost of goods sold and should have been presented as a reduction to revenue and therefore have been
reclassified to revenue for all periods presented. These reclassifications had no impact on net income.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: All highly liquid debt instruments purchased with a maturity of three months or less at the date of acquisition
are included in cash and cash equivalents.
Restricted Cash: We show amounts paid into an escrow account for future distribution to class members of our Securities Litigation
settlement as restricted cash, and the corresponding liability in current liabilities under the caption “Securities Litigation.” The liability will be
discharged at such time as the settlement is declared effective by the court. Refer to Financial Note 18, “Other Commitments and Contingent
Liabilities.”
Marketable Securities Available for Sale: We carry our marketable securities which are available for sale at fair value and the net unrealized
gains and losses, net of the related tax effect, computed in marking these securities to market have been reported within stockholders’ equity.
Inventories: We state inventories at the lower of cost or market. Inventories for the Pharmaceutical Solutions and Medical-Surgical
Solutions segments consist of merchandise held for resale. For our Pharmaceutical Solutions segment, the majority of the cost of domestic
inventories is determined on the last-in, first-out (“LIFO”) method and international inventories are stated using the first-in, first-out (“FIFO”)
method. Cost of inventories for our Medical-Surgical Solutions segment is primarily determined on the FIFO method. Provider Technologies
segment inventories consist of computer hardware with cost determined either by the specific identification or the FIFO method. The LIFO
method is used to value approximately 85% to 90% of our inventories at March 31, 2006 and 2005. Total inventories before the LIFO cost
adjustment, which approximates replacement cost, were $7,415 million and $7,682 million at March 31, 2006 and 2005. Vendor rebates,
allowances and chargebacks received from vendors are generally accounted for as a reduction in the cost of inventory and are recognized when
the inventory is sold.
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