Cisco 2005 Annual Report Download - page 17

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To position ourselves to take advantage of future growth opportunities, we have continued to rely on innovation and on taking
good business risks. Our innovation strategy is a combination of internal development, strategic alliances, and acquisitions designed
to provide innovative products to enhance our competitive position. We envision an architectural evolution of networking from
simple connectivity of products to intelligent systems. As such, we expect that industry consolidation and the integration of our core
and advanced technologies will occur along both technology and business architecture lines. In fiscal 2005, our internal development
has resulted in many new product introductions, and we also increased our growth opportunities through new key strategic alliances.
We have also completed 17 acquisitions to further extend our talent and technology opportunities. Further, we added, and intend to
continue to add, both engineering and sales resources as we focus on developing the next wave of advanced technologies, growing
the commercial market segment, capitalizing on our emerging market opportunities, and increasing our market share gains.
As we evaluate our growth prospects and manage our operations for the future, we continue to believe that a leading indicator
of our growth will be the gross domestic product, or GDP, of the countries into which we sell our products. Beginning in fiscal 2006,
we have reorganized our geographic segments to align our focus on long-term growth, capture emerging market opportunities, and
serve our customers better.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the
United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated
Financial Statements and accompanying notes. Note 2 to the Consolidated Financial Statements describes the significant accounting
policies and methods used in the preparation of the Consolidated Financial Statements. The accounting policies described below
are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions,
and estimates used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from the
amounts reported based on these policies.
Revenue Recognition
Our networking and communications products are integrated with software that is essential to the functionality of the equipment.
We provide unspecified software upgrades and enhancements related to the equipment through our maintenance contracts for
most of our products. Accordingly, we account for revenue in accordance with Statement of Position No. 97-2, “Software Revenue
Recognition,” and all related interpretations. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product,
system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met.
Contracts, Internet commerce agreements, and customer purchase orders are generally used to determine the existence of an
arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. We assess whether the fee
is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund
or adjustment. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and
analysis, as well as the customer’s payment history. When a sale involves multiple elements, such as sales of products that include
services, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized
when revenue recognition criteria for each element are met. The amount of product and service revenue recognized is affected by our
judgments as to whether an arrangement includes multiple elements and, if so, whether vendor-specific objective evidence of fair value
exists. Changes to the elements in an arrangement and our ability to establish vendor-specific objective evidence for those elements
could affect the timing of the revenue recognition. Our total deferred revenue for products was $1.4 billion and $1.5 billion as of July 30,
2005 and July 31, 2004, respectively. Technical support services revenue is deferred and recognized ratably over the period during which the
services are to be performed, which is typically from one to three years. Advanced services revenue is recognized upon delivery or completion
of performance. Our total deferred revenue for services was $3.6 billion and $3.0 billion as of July 30, 2005 and July 31, 2004, respectively.
We make sales to distributors and retail partners and recognize revenue based on a sell-through method using information
provided by them. Our distributors and retail partners participate in various cooperative marketing and other programs, and we maintain
estimated accruals and allowances for these programs. If actual credits received by our distributors and retail partners for these programs
were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.
Allowance for Doubtful Accounts and Sales Returns
Our accounts receivable balance, net of allowance for doubtful accounts, was $2.2 billion as of July 30, 2005, compared with $1.8 billion
as of July 31, 2004. The allowance for doubtful accounts as of July 30, 2005 was $162 million or 6.8% of the gross accounts receivable
balance, compared with $179 million or 8.9% of the gross accounts receivable balance as of July 31, 2004. The allowance is based on our
assessment of the collectibility of customer accounts. We regularly review the allowance by considering factors such as historical experience,
credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.
Management’s Discussion and Analysis of Financial Condition and Results of Operations