Western Digital 2010 Annual Report Download - page 63

Investments
The Company’s investments consist of auction-rate securities, which are primarily backed by insurance products
with original maturities greater than three months. The Company has classified these investments as available-for-sale
securities and they are carried at fair value within other non-current assets in the consolidated balance sheets.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable, investments, accounts payable and accrued expenses
approximate fair value for all periods presented because of the short-term maturity of these assets and liabilities or, in the
case of investments, these are recorded using appropriate market information. The carrying amount of debt approximates
fair value because of its variable interest rate.
Concentration of Credit Risk
The Company sells its products to computer manufacturers, resellers and retailers throughout the world. The
Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral.
The Company maintains allowances for potential credit losses, and such losses have historically been within
management’s expectations. At any given point in time, the total amount outstanding from any one of a number of
its customers may be individually significant to the Company’s financial results. At July 2, 2010 and July 3, 2009, the
Company had reserves for potential credit losses of $6 million and $14 million, respectively, and net accounts receivable
of $1.3 billion and $926 million, respectively. The Company also has cash equivalent and investment policies that limit
the amount of credit exposure to any one financial institution or investment instrument and requires that investments be
made only with financial institutions or in investment instruments evaluated as highly credit-worthy.
Inventory
The Company values inventory at the lower of cost (first-in, first out and weighted average methods) or net
realizable value. The first-in, first-out (“FIFO”) method is used to value the cost of the majority of the Company’s
inventories, while the weighted-average method is used to value precious metal inventories. Weighted-average cost is
calculated based upon the cost of precious metals at the time they are received by the Company. The Company has
determined that it is not practicable to assign specific costs to individual units of precious metals and, as such, precious
metals are relieved from inventory based on the weighted-average cost of the inventory at the time the inventory is used
in production. The weighted average method of valuing precious metals does not materially differ from a first-in, first-
out method. As of July 2, 2010 and July 3, 2009, 82% of the inventory was valued using the FIFO method with the
remainder valued using the weighted average method. Inventory write-downs are recorded for the valuation of inventory
at the lower of cost or net realizable value by analyzing market conditions and estimates of future sales prices as compared
to inventory costs and inventory balances.
The Company evaluates inventory balances for excess quantities and obsolescence on a regular basis by analyzing
estimated demand, inventory on hand, sales levels and other information, and reduces inventory balances to net realizable
value for excess and obsolete inventory based on this analysis. Unanticipated changes in technology or customer demand
could result in a decrease in demand for one or more of the Company’s products, which may require a write down of
inventory that could materially affect operating results.
Property and Equipment
The cost of property and equipment is depreciated over the estimated useful lives of the respective assets. The
Company’s buildings are being depreciated over periods ranging from fifteen to thirty years. The majority of the
Company’s equipment is being depreciated over periods of three to seven years. Depreciation is computed on a straight-
line basis. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related
lease terms.
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)