The 2009 annual report for Cisco System contains the following information (dollars in million):
7/25/2009 7/26/2008
Inventory $1,074 $1,235
On the income statement Cisco reported that the cost of sales related to the inventory was $10.5 billion ($11.7 billion for the year ending 7/26/2008). Based on these dollar amounts, inventory is an important investment for Cisco’s business cycle. In the notes to the financial statements the company reports, “Inventories are stated at the lower of cost or market. The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecast. The write-down is measured as the difference between the cost of the inventory and market based upon assumption about future demand and charged to . . . cost of sales.”
a. Explain what would happen to the balance sheet value of inventory ($1.074 billion in the year ending 7/25/2009) if the company determined that a portion of its inventory was “obsolete”.
b. Who is ultimately responsible for determining the forecast for future demand for the company’s inventories?
c. Discuss how the concepts of objectivity, conservatism, and market value enter into how Cisco values its inventory on the balance sheet.