Recompra de ações e o efeito dilutivo das opções de ações

Recompra de ações como um dispositivo de gerenciamento de resultados

Investigamos se as empresas usam recompras de ações para atender ou superar as previsões de lucro por ação (EPS) dos analistas. Identificamos as condições sob as quais as recompras aumentam o EPS e documentam a frequência das recompras de accretive de 1988 a 2001. Encontramos um número desproporcionalmente grande de recompras de ações de accretive entre as empresas que teriam perdido as previsões dos analistas sem a recompra. O componente de recompra de ganhos induzidos por recompra parece ser descontado pelo mercado, e esse desconto é maior quando a recompra parece motivada pela administração do EPS, embora o uso da recompra para evitar previsões de analistas perdidas pareça atenuar parte da resposta negativa do preço das ações.

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Nós nos beneficiamos de comentários e sugestões úteis fornecidos por Franco Wong (o árbitro), Mark Nelson, Paul Simko, Doug Skinner, Beverly Walther, Joe Weber, Jerry Zimmerman (o editor) e participantes da oficina da Universidade do Arizona, Brigham Young University. , a Universidade de Chicago, a Universidade de Cornell, a Duke University, o MIT, a Northwestern University, a Queen's University, a SUNY Buffalo, a Universidade de Utah, a Washington University em St. Louis e a Universidade de Wisconsin. Os autores reconhecem com gratidão a contribuição da Thomson Financial no fornecimento de dados de previsão de lucros, disponíveis através do Sistema de Estimativa de Corretores Institucionais, como parte de um amplo programa acadêmico para incentivar a pesquisa de expectativas de lucros.

Opções de ações de funcionários, diluição de EPS e recompras de ações ☆

Investigamos se as decisões de recompra de ações de executivos são afetadas por seus incentivos para administrar o lucro diluído por ação (EPS). Descobrimos que os executivos aumentam o nível de recompra de ações de suas empresas quando: (1) o efeito dilutivo das opções de ações de funcionários (ESOs) sobre o aumento de EPS diluído e (2) ganhos estão abaixo do nível necessário para atingir a taxa desejada de Crescimento de EPS. Também descobrimos que as decisões de recompra dos executivos não estão associadas a exercícios reais do ESO, sugerindo que elas são impulsionadas por incentivos para administrar o lucro por ação diluído, mas não básico, e fortalecendo nossa interpretação do gerenciamento de resultados.

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Bens e Wong reconhecem o apoio financeiro da Universidade de Chicago, da Graduate School of Business, e Skinner da KPMG e do programa Neubauer Faculty Fellows da Universidade de Chicago, Graduate School of Business. Agradecemos os comentários úteis de Kirsten Anderson, Bob Bowen, Eugene Fama, Adam Gileski, Clement Har, Gene Imhoff, Richard Leftwich, Thomas Lys, Shiva Rajgopal, Scott Richardson, Terry Shevlin, Shores D., Ross Watts, Jerry Zimmerman, um Árbitro anônimo e participantes da oficina no Encontro Anual da AAA em San Antonio, na Conferência das JAEs de 2002 e nas universidades da Colúmbia Britânica, Chicago, Iowa, Michigan, Minnesota, Rochester e Washington (Seattle).

Notas às Demonstrações Financeiras Consolidadas - Relatório Anual 2008.

Navegação Hierárquica.

1. Base de Apresentação.

O ano fiscal da Cisco Systems, Inc. (a "Empresa" ou "Cisco") é de 52 ou 53 semanas, que termina no último sábado de julho. O exercício fiscal de 2008, 2007 e 2006 foram exercícios fiscais de 52 semanas. As Demonstrações Financeiras Consolidadas incluem as contas da Cisco e suas subsidiárias. Todas as contas e transações entre companhias foram eliminados. A empresa conduz negócios globalmente e é gerenciada principalmente em uma base geográfica nos seguintes cinemas: Estados Unidos e Canadá; Mercados Europeus; Mercados emergentes; Ásia-Pacífico; e no Japão. O teatro dos Mercados Emergentes consiste da Europa Oriental, América Latina, Oriente Médio e África, e da Rússia e da Comunidade de Estados Independentes (CEI).

2. Sumário das Políticas Contábeis Significativas.

(a) Caixa e Equivalentes de Caixa.

A Companhia considera todos os investimentos de alta liquidez comprados com prazo original ou remanescente de menos de três meses na data da compra como equivalentes de caixa. Caixa e equivalentes de caixa são mantidos em diversas instituições financeiras.

(b) Investimentos.

Os investimentos da Companhia incluem títulos de agências governamentais e governamentais, títulos de dívida corporativa, títulos lastreados em ativos, títulos e notas municipais e títulos patrimoniais negociados em bolsa. Esses investimentos são mantidos sob custódia de várias instituições financeiras importantes. O método de identificação específico é utilizado para determinar a base de custo dos títulos de renda fixa alienados. O método da média ponderada é utilizado para determinar a base de custo dos títulos patrimoniais negociados publicamente alienados. Em 26 de julho de 2008 e 28 de julho de 2007, os investimentos da Companhia foram classificados como disponíveis para venda e esses investimentos são registrados no Balanço Patrimonial Consolidado pelo valor justo. Ganhos e perdas não realizados sobre esses investimentos, na medida em que os investimentos não são protegidos, são incluídos como um componente separado do resultado abrangente acumulado, líquido de impostos.

A Companhia reconhece uma redução no valor recuperável quando um declínio no valor justo de seus investimentos abaixo da base de custo é considerado não temporário. A Companhia considera vários fatores ao determinar se deve reconhecer uma redução no valor recuperável, incluindo o período e a extensão em que o valor justo foi menor do que a base de custo da Companhia, a condição financeira e as perspectivas de curto prazo da investida, e a intenção da empresa e a capacidade de manter o investimento por um período de tempo suficiente para permitir qualquer recuperação antecipada do valor de mercado.

A Companhia também possui investimentos em empresas de capital fechado. Estes investimentos estão incluídos em outros ativos no Balanço Patrimonial Consolidado e são principalmente contabilizados pelo custo. A Companhia monitora esses investimentos quanto a perdas por redução ao valor recuperável e faz reduções apropriadas nos valores contábeis, caso a Companhia determine que uma redução no valor recuperável é necessária, principalmente com base na situação financeira e nas perspectivas de curto prazo dessas empresas.

(c) estoques.

Os estoques são demonstrados pelo menor valor entre custo ou mercado. O custo é calculado usando o custo padrão, que se aproxima do custo real, em uma base de primeiro a entrar, primeiro a sair. A Companhia fornece reduções de estoque com base em estoques em excesso e obsoletos, determinados principalmente por previsões futuras de demanda. A redução é medida como a diferença entre o custo do estoque e o mercado com base em suposições sobre a demanda futura e cobrada da provisão de estoque, que é um componente do custo de vendas. No momento do reconhecimento da perda, uma base nova e de custo mais baixo para esse inventário é estabelecida, e as mudanças subseqüentes nos fatos e circunstâncias não resultam na restauração ou aumento naquela base de custo recém-estabelecida. Além disso, a Companhia registra um passivo para compromissos de compra firmes, não canceláveis ​​e incondicionais com fabricantes e fornecedores contratados por quantidades que excedem as previsões futuras de demanda da Companhia, consistentes com sua avaliação de estoques excessivos e obsoletos.

(d) Provisão para devedores duvidosos.

A provisão para créditos de liquidação duvidosa é baseada na avaliação da empresa sobre a cobrança das contas dos clientes. A Companhia revisa regularmente a provisão considerando fatores como experiência histórica, qualidade de crédito, a idade dos saldos de contas a receber e condições econômicas atuais que podem afetar a capacidade de pagamento de um cliente.

(e) Financiamento de Recebíveis e Garantias.

A Companhia fornece acordos financeiros, incluindo arrendamentos, contratos de serviços financiados e empréstimos, para que determinados clientes qualificados construam, mantenham e atualizem suas redes. Os recebíveis de arrendamentos representam basicamente arrendamentos de tipo de venda e de financiamento direto. Arrendamentos e empréstimos normalmente têm prazos de dois a três anos e geralmente são garantidos por uma garantia mobiliária nos ativos subjacentes. A Companhia mantém uma provisão para recebíveis de financiamento incobráveis ​​com base em vários fatores, incluindo a classificação de risco da carteira, condições macroeconômicas, experiência histórica e outros fatores de mercado. A Companhia também fornece garantias de financiamento, que geralmente são para vários acordos de financiamento de terceiros para canalizar parceiros e outros clientes. A Companhia poderia ser chamada para efetuar o pagamento sob essas garantias em caso de não pagamento a terceiros. Veja a Nota 6.

(f) Depreciação e Amortização.

O imobilizado é registrado ao custo, menos depreciação e amortização acumuladas. A depreciação e a amortização são calculadas pelo método linear durante os seguintes períodos:

(g) Ágio e ativos intangíveis adquiridos.

O ágio é testado para perda de valor anualmente e durante o período entre os testes anuais em determinadas circunstâncias, e baixado quando prejudicado. Com base nos testes de deterioração realizados, não houve redução no valor do ágio no exercício de 2008, 2007. Os ativos intangíveis adquiridos, exceto o ágio, são amortizados ao longo de suas vidas úteis, a menos que essas vidas sejam consideradas indefinidas. Os ativos intangíveis adquiridos são registrados ao custo, deduzido da amortização acumulada. A amortização é calculada ao longo da vida útil estimada dos respectivos ativos, geralmente de dois a sete anos.

(h) Imparidade de Activos de Vida Longa.

Ativos de vida longa e certos ativos intangíveis identificáveis ​​a serem mantidos e utilizados são revisados ​​para a verificação de impairment sempre que eventos ou mudanças nas circunstâncias indicarem que o valor contábil de tais ativos pode não ser recuperável. A determinação da recuperabilidade de ativos de longa duração é baseada em uma estimativa de fluxos de caixa futuros não descontados resultante do uso do ativo e sua disposição final. A mensuração de uma perda por redução ao valor recuperável para ativos de longa duração e certos ativos intangíveis identificáveis ​​que a administração espera deter e usar se baseia no valor justo do ativo. Ativos de vida longa e certos ativos intangíveis identificáveis ​​a serem alienados são registrados pelo menor valor entre o valor contábil e o valor justo menos custos de venda.

(i) Instrumentos Derivativos.

A Companhia reconhece instrumentos derivativos como ativos ou passivos e mensura esses instrumentos ao valor justo. A contabilização de mudanças no valor justo de um derivativo depende do uso pretendido do derivativo e da designação resultante. Para um instrumento derivativo designado como hedge de valor justo, o ganho ou a perda é reconhecido no resultado no período da mudança juntamente com a perda ou ganho compensatório sobre o item coberto atribuído ao risco que está sendo protegido. Para um instrumento derivativo designado como hedge de fluxo de caixa, a parcela efetiva do ganho ou perda do derivativo é inicialmente reportada como um componente de outros resultados abrangentes acumulados e subseqüentemente reclassificada no resultado quando a exposição protegida afeta os resultados. A parte ineficaz do ganho ou perda é reportada nos lucros imediatamente. Para instrumentos derivativos que não são designados como hedge contábil, mudanças no valor justo são reconhecidas no resultado no período da mudança.

(j) Valor Justo de Instrumentos Financeiros.

O valor justo de determinados instrumentos financeiros da Companhia, incluindo caixa e equivalentes de caixa, remuneração acumulada e outros passivos circulantes, aproxima-se do valor contábil por causa de seus vencimentos curtos. Além disso, o valor justo dos recebíveis de empréstimos da Companhia e contratos de serviços financiados também se aproximam do valor contábil. Os valores justos dos investimentos de renda fixa, dos títulos patrimoniais de capital aberto e da dívida de longo prazo da Companhia são determinados utilizando preços cotados no mercado para esses títulos ou instrumentos financeiros similares.

(k) Participação Minoritária.

A Companhia consolida seu investimento em um fundo de capital de risco administrado pela SOFTBANK Corp. e suas afiliadas (& SO SOFTBANK & rdquo;). Em 26 de julho de 2008, a participação minoritária de US $ 49 milhões representa a participação do SOFTBANK no fundo de capital de risco.

(l) Conversão de moeda estrangeira.

Ativos e passivos de subsidiárias estrangeiras que operam em moeda nacional, onde a moeda nacional é a moeda funcional, são convertidos para dólares norte-americanos pelas taxas de câmbio em vigor na data do balanço, com os ajustes de conversão resultantes registrados diretamente em uma moeda. componente separado do outro rendimento integral acumulado. As contas de receita e despesa são convertidas pelas taxas de câmbio médias durante o ano. Os ajustes de remensuração são registrados em outros resultados, líquidos.

(m) Concentrações de Risco.

Caixa e equivalentes de caixa são mantidos em diversas instituições financeiras. Depósitos mantidos com bancos podem exceder o valor do seguro fornecido sobre tais depósitos. Geralmente, esses depósitos podem ser resgatados sob demanda e são mantidos com instituições financeiras com crédito de boa reputação e, portanto, possuem risco de crédito mínimo. A Companhia busca mitigar esses riscos, distribuindo seu risco por várias contrapartes e monitorando os perfis de risco dessas contrapartes.

A Companhia realiza avaliações de crédito contínuas de seus clientes e, com exceção de certas transações de financiamento, não exige garantia de seus clientes. Os clientes da empresa estão principalmente nos mercados corporativo, de prestação de serviços e comercial. A Companhia recebe alguns de seus componentes de fornecedores exclusivos. Além disso, a empresa conta com um número limitado de fabricantes e fornecedores contratados para fornecer serviços de fabricação para seus produtos. A incapacidade de um fabricante ou fornecedor contratado para atender aos requisitos de suprimento da Companhia poderia afetar materialmente os resultados operacionais futuros.

(n) Reconhecimento de receita.

Os produtos da empresa geralmente são integrados com software essencial para a funcionalidade do equipamento. Além disso, a Companhia fornece atualizações e aprimoramentos de software não especificados relacionados ao equipamento por meio de seus contratos de manutenção para a maioria de seus produtos. Assim, a Empresa contabiliza a receita de acordo com a Declaração de Posição No. 97-2, "Software Revenue Recognition", & rdquo; e todas as interpretações relacionadas. Para as vendas de produtos onde o software é incidental ao equipamento, ou em acordos de hospedagem, a Empresa aplica as disposições do Boletim de Contabilidade do Pessoal No. 104, "Reconhecimento de Receitas", & nbsp; e todas as interpretações relacionadas.

A Companhia reconhece a receita quando há evidência persuasiva de um acordo, a entrega ocorreu, a taxa é fixa ou determinável e a cobrança é razoavelmente assegurada. Nos casos em que a aceitação final do produto, sistema ou solução é especificada pelo cliente, a receita é diferida até que todos os critérios de aceitação tenham sido atendidos. A receita de serviços de suporte técnico é diferida e reconhecida proporcionalmente ao longo do período durante o qual os serviços serão executados, o que geralmente é de um a três anos. A receita de serviços avançados é reconhecida no momento da entrega ou da conclusão do desempenho.

Quando uma venda envolve vários elementos, como vendas de produtos que incluem serviços, toda a taxa do contrato é alocada para cada elemento respectivo com base no seu valor justo relativo e reconhecida quando os critérios de reconhecimento de receita para cada elemento são atendidos. O valor justo de cada elemento é estabelecido com base no preço de venda cobrado quando o mesmo elemento é vendido separadamente.

A empresa usa distribuidores que armazenam estoques e geralmente vendem para integradores de sistemas, provedores de serviços e outros revendedores. Além disso, certos produtos são vendidos através de parceiros varejistas. A Companhia refere-se a essas vendas através de distribuidores e parceiros de varejo como seu sistema de vendas de dois níveis para o cliente final. A receita de distribuidores e parceiros de varejo é reconhecida com base em um método de venda por meio de informações fornecidas por eles. Distribuidores e parceiros varejistas participam de vários programas de marketing cooperativo e outros, e a Companhia mantém provisões e provisões estimadas para esses programas. A Empresa acumula custos de garantia, devoluções de vendas e outras licenças com base em sua experiência histórica.

(o) Custos de Publicidade.

A Companhia contabiliza todos os custos de publicidade quando incorridos. Os custos de publicidade não foram significativos para todos os anos apresentados.

(p) Despesa de Remuneração Baseada em Ações.

O SFAS 123 requer a mensuração e reconhecimento de despesas de remuneração para todas as concessões de pagamento baseado em ações feitas a funcionários e diretores, incluindo opções de ações de funcionários e compras de ações de funcionários relacionadas ao Plano de Compra de Ações do Funcionário (baseado em direitos de compra de funcionários). sobre os valores justos estimados. O SFAS 123 (R) exige que as empresas estipulem o valor justo dos prêmios de pagamento baseado em ações na data da concessão, usando um modelo de precificação de opções. O valor dos prêmios que, em última instância, devem ser investidos é reconhecido como despesa durante os períodos de serviço exigidos nas Declarações de Operações Consolidadas da Companhia.

Despesas com remuneração com base em ações reconhecidas nas Demonstrações de Operações Consolidadas da Companhia para todos os exercícios apresentados incluíram despesas de remuneração de benefícios baseados em ações concedidas antes, mas ainda não concedidas em 30 de julho de 2005 com base na data da concessão. estimados de acordo com as provisões pro forma do SFAS 123, e despesas de remuneração para os prêmios de pagamento baseado em ações concedidos após 30 de julho de 2005 com base na data de concessão estimados de acordo com as disposições do SFAS 123 (R). Em conjunto com a adoção do SFAS 123 (R) no início do exercício fiscal de 2006, a Companhia mudou seu método de atribuir o valor da remuneração baseada em ações às despesas da abordagem de opção múltipla acelerada ao método de opção única linear . Despesas de remuneração para todos os prêmios de pagamento baseados em ações concedidos até 30 de julho de 2005 continuarão a ser reconhecidos usando a abordagem de opção múltipla acelerada, enquanto as despesas de remuneração para todos os prêmios de pagamento baseado em ações concedidas após 30 de julho de 2005 são reconhecidas usando o método de opção única de linha reta. Como a despesa de compensação baseada em ações reconhecida nas Demonstrações Consolidadas de Operações é baseada em prêmios que devem ser adquiridos, ela foi reduzida por confiscos.

Após a adoção do SFAS 123 (R), a Companhia também mudou seu método de avaliação para prêmios baseados em ações concedidos a partir do ano fiscal de 2006 para um modelo binômio de precificação de opções ("modelo binômio-rede") do Black-Scholes. modelo de precificação de opções ("modelo Black-Scholes") anteriormente usado para as informações pro forma da Companhia exigidas pelo SFAS 123. A determinação do valor justo dos prêmios de pagamento baseado em ações na data de concessão usando um modelo de precificação de opções é afetado pelo preço da ação da empresa, bem como pelas suposições relativas a um número de variáveis ​​altamente complexas e subjetivas. Essas variáveis ​​incluem, mas não se limitam a, a volatilidade esperada do preço da ação da Companhia durante o prazo dos prêmios e os comportamentos dos exercícios de opções de ações de funcionários reais e projetados. Os modelos de precificação de opções foram desenvolvidos para uso na estimativa do valor das opções negociadas que não possuem restrições de vesting ou hedge e são totalmente transferíveis. Como as opções de ações da empresa têm certas características que são significativamente diferentes das opções negociadas e como as mudanças nas premissas subjetivas podem afetar materialmente o valor estimado, na opinião da administração, os modelos de avaliação existentes podem não fornecer uma medida precisa da valor justo das opções de ações para empregados da Companhia. Embora o valor justo das opções de compra de ações seja determinado de acordo com o SFAS 123 (R) e SAB 107 usando um modelo de precificação de opções, esse valor pode não ser indicativo do valor justo observado em uma transação de compra / venda voluntária.

A Companhia optou por aplicar o método de transição alternativo fornecido na Posição do Quadro de Funcionários do FASB No. FAS 123 (R) -3 'Eleição de Transição Relacionada à Contabilização dos Efeitos Fiscais dos Prêmios de Pagamento Baseado em Ações'. para cálculo dos efeitos fiscais da remuneração baseada em ações de acordo com o SFAS 123 (R). O método de transição alternativa inclui métodos simplificados para estabelecer o saldo inicial do pool de capital integralizado adicional (& quot; pool APIC & quot;) relacionado aos efeitos fiscais da remuneração baseada em ações de funcionários e para determinar o impacto subsequente no pool APIC e Demonstrações Consolidadas de Fluxos de Caixa dos efeitos fiscais dos prêmios de compensação baseados em ações de funcionários que estão em circulação após a adoção do SFAS 123 (R).

(q) Custos de desenvolvimento de software.

Os custos de desenvolvimento de software precisam ser capitalizados de acordo com a Declaração de Padrões Contábeis Financeiros No. 86, "Contabilização dos Custos do Software de Computador a Serem Vendidos, Alugados ou de Qualquer Outra Forma Comercializados", & rdquo; não foram materiais até o momento. Custos de desenvolvimento de software para uso interno que devem ser capitalizados de acordo com a Declaração de Posição No. 98-1, "Contabilização dos Custos de Software de Computador Desenvolvido ou Obtido para Uso Interno", & rdquo; também não foram materiais até o momento.

(r) Imposto de Renda.

A despesa com imposto de renda é baseada na receita contábil financeira antes dos impostos. Impostos diferidos ativos e passivos são reconhecidos para os efeitos fiscais esperados de diferenças temporárias entre as bases fiscais de ativos e passivos e seus valores reportados. As provisões de avaliação são registradas para reduzir os ativos fiscais diferidos até o montante que será mais provável do que não ser realizado.

Em 29 de julho de 2007, a Companhia adotou o FIN 48, que é uma mudança na contabilização do imposto de renda. O FIN 48 contém uma abordagem em duas etapas para reconhecer e mensurar as posições fiscais incertas contabilizadas de acordo com o SFAS 109. O primeiro passo é avaliar a posição fiscal para reconhecimento determinando se o peso da evidência disponível indica que é mais provável que não. que a posição será mantida na auditoria, incluindo a resolução de recursos relacionados ou processos de litígio, se houver. O segundo passo é mensurar o benefício fiscal como o maior valor que tem mais de 50% de probabilidade de ser realizado no momento da liquidação. A Companhia classificará o passivo por benefícios fiscais não reconhecidos como circulante na medida em que a Companhia antecipar o pagamento (ou recebimento) de caixa no prazo de um ano. Os juros e multas relacionados a posições fiscais incertas são reconhecidos na provisão para imposto de renda. Veja a Nota 13.

(s) Cálculo do Lucro Líquido por Ação.

O lucro líquido básico por ação é calculado utilizando o número médio ponderado de ações ordinárias em circulação durante o período. O lucro líquido diluído por ação é calculado utilizando a média ponderada de ações ordinárias e ações ordinárias potenciais diluidoras em circulação durante o período. As ações ordinárias potenciais diluidoras consistem principalmente em opções de ações para funcionários, estoque restrito e unidades de estoque restritas.

Declaração de Padrões Contábeis Financeiros (SFAS) No. 128, & ldquo; Lucro por ação, & rdquo; exige que as opções de ações de ações de funcionários, ações não investidas e instrumentos de patrimônio semelhantes concedidos pela Companhia sejam tratados como ações ordinárias em circulação no cálculo do lucro diluído por ação. As ações diluídas incluem o efeito dilutivo das opções dentro do dinheiro, que é calculado com base no preço médio da ação para cada período fiscal, usando o método de ações em tesouraria. Segundo o método de ações em tesouraria, o valor que o funcionário deve pagar pelo exercício das opções, o valor do custo da remuneração para serviços futuros que a Companhia ainda não reconheceu e o valor dos benefícios fiscais que seriam registrados no capital adicional quando o prêmio se torna dedutível é assumido para ser usado para recomprar ações.

(t) Consolidação de Entidades de Interesse Variável.

O Financial Accounting Standards Board (FASB) emitiu a Interpretação No. 46 do FASB, “Consolidação de entidades de interesse variável”. (“FIN 46”), em janeiro de 2003. A FIN 46 exige que se uma entidade for a beneficiária primária de uma entidade de participação variável, os ativos, passivos e resultados das operações da entidade de participação variável devem ser incluídos nas demonstrações contábeis consolidadas. declarações da entidade. Interpretação do FASB No. 46 (R), “Consolidação de Entidades de Interesse Variável” (“FIN 46 (R)”), foi emitida em dezembro de 2003. A Companhia adotou o FIN 46 (R) em 24 de janeiro de 2004. Para informações adicionais sobre entidades de participação variável, veja a Nota 10.

(u) Uso de Estimativas.

A preparação de demonstrações financeiras e divulgações relacionadas em conformidade com os princípios contábeis geralmente aceitos nos Estados Unidos exige que a administração faça estimativas e julgamentos que afetam os valores reportados nas Demonstrações Contábeis Consolidadas e notas explicativas. As estimativas são usadas para o seguinte, entre outras:

Reconhecimento de receita Provisão para créditos de liquidação duvidosa e devoluções de vendas Valorização de estoque e responsabilidade por compromissos de compra com fabricantes e fornecedores contratados. Custos com garantia. Despesas com remuneração com base em ações.

Os resultados reais experimentados pela Companhia podem diferir materialmente das estimativas da administração.

(v) Pronunciamentos Contábeis Recentes.

Em setembro de 2006, o FASB emitiu o SFAS No. 157, “Fair Value Measurements & rdquo; (& SFFS 157 & rdquo;). O SFAS 157 define valor justo, estabelece uma estrutura para mensurar o valor justo e aprimora a divulgação da mensuração do valor justo. Em fevereiro de 2008, o FASB emitiu a Posição de Funcionários do FASB (“FSP”) 157-1, “Aplicação do SFAS No. 157 à Declaração do FASB No. 13 e Outros Pronunciamentos Contábeis que Abordam as Mensurações do Valor Justo para Fins de Classificação do Arrendamento ou Medição sob a Declaração 13 & rdquo; ("FSP 157-1") e FSP 157-2, "Data Efetiva da Declaração do FASB No. 157". (& ldquo; FSP 157-2 & rdquo;). O FSP 157-1 altera o SFAS 157 para remover determinadas transações de leasing de seu escopo. O FSP 157-2 atrasa a data de vigência do SFAS 157 para todos os ativos não financeiros e passivos não financeiros, exceto itens reconhecidos ou divulgados a valor justo nas demonstrações financeiras em bases recorrentes (pelo menos anualmente), até o início do primeiro exercício. trimestre fiscal de 2010. As exigências de mensuração e divulgação relacionadas a ativos financeiros e passivos financeiros são efetivas para a Companhia no primeiro trimestre do ano fiscal de 2009. A adoção do SFAS 157 para ativos financeiros e passivos financeiros não deverá ter um impacto resultados de operações ou posição financeira da Companhia. A Companhia está atualmente avaliando o impacto que o SFAS 157 terá em seus resultados operacionais e posição financeira quando aplicado a ativos não financeiros e passivos não financeiros a partir do primeiro trimestre do ano fiscal de 2010.

Em fevereiro de 2007, o FASB emitiu o SFAS No. 159, "A Opção de Valor Justo para Ativos Financeiros e Passivos Financeiros", incluindo uma emenda do Pronunciamento FASB No. 115 & rdquo; (& ldquo; SFAS 159 & rdquo;). O SFAS 159 deve expandir o uso da contabilização do valor justo, mas não afeta os padrões existentes que exigem que certos ativos ou passivos sejam contabilizados pelo valor justo. O objetivo do SFAS 159 é aperfeiçoar os relatórios financeiros, oferecendo às empresas a oportunidade de mitigar a volatilidade nos lucros reportados causada pela medição de ativos e passivos relacionados de forma diferente, sem a necessidade de aplicar provisões contábeis de hedge complexas. De acordo com a SFAS 159, uma companhia pode escolher, em datas de eleição especificadas, mensurar itens elegíveis a valor justo e reportar ganhos e perdas não realizados em itens para os quais a opção de valor justo foi eleita em ganhos a cada data subsequente. O SFAS 159 é efetivo para a Companhia no primeiro trimestre do ano fiscal de 2009, e não se espera que tenha um impacto material nos resultados operacionais ou na posição financeira da Companhia.

SFAS 141 (R) e SFAS 160.

Em dezembro de 2007, o FASB emitiu o SFAS No. 141 (revisado em 2007), “Business Combinations & rdquo; (& ldquo; SFAS 141 (R) & rdquo;) e SFAS nº 160, & rdquo; Participações Não Controladas em Demonstrações Financeiras Consolidadas & mdash; uma alteração do ARB No. 51 & rdquo; (& ldquo; SFAS 160 & rdquo;). O SFAS 141 (R) mudará significativamente as práticas atuais em relação às combinações de negócios. Entre as mudanças mais significativas, o SFAS 141 (R) expande a definição de um negócio e uma combinação de negócios; exige que o adquirente reconheça os ativos adquiridos, os passivos assumidos e os interesses que não controlam (incluindo o ágio), mensurados pelo valor justo na data da aquisição; exige que as despesas relacionadas à aquisição e os custos de reestruturação sejam reconhecidos separadamente da combinação de negócios; exige que os ativos adquiridos e passivos assumidos de contingências contratuais e não contratuais sejam reconhecidos pelos valores justos na data de aquisição com alterações subsequentes reconhecidas no resultado; e requer que a pesquisa e desenvolvimento em processo sejam capitalizados pelo valor justo como um ativo intangível de vida indefinida. O SFAS 160 mudará a contabilidade e os relatórios para interesses minoritários, informando-os como patrimônio separado do patrimônio da entidade controladora, bem como exigindo divulgações ampliadas. O SFAS 141 (R) e o SFAS 160 são efetivos para demonstrações contábeis emitidas para exercícios fiscais iniciados após 15 de dezembro de 2008. A Companhia está atualmente avaliando o impacto do SFAS 141 (R) e do SFAS 160 em seus resultados operacionais e posição financeira. .

Em março de 2008, o FASB emitiu o SFAS No. 161, “Divulgações sobre Instrumentos Derivativos e Atividades de Hedge, uma emenda ao SFAS No. 133”. (& ldquo; SFAS 161 & gt;), que requer divulgações adicionais sobre os objetivos do uso de instrumentos derivativos; o método pelo qual os instrumentos derivativos e os itens com hedge relacionados são contabilizados de acordo com a Declaração FASB No.133 e suas interpretações relacionadas; e o efeito de instrumentos derivativos e itens protegidos relacionados na posição financeira, desempenho financeiro e fluxos de caixa. O SFAS 161 também exige a divulgação dos valores justos dos instrumentos derivativos e seus ganhos e perdas em um formato tabular. O SFAS 161 é efetivo para demonstrações financeiras emitidas para exercícios fiscais e períodos intermediários iniciados após 15 de novembro de 2008, com adoção antecipada incentivada. A Companhia está atualmente avaliando o impacto que a adoção do SFAS 161 terá nas suas divulgações das demonstrações contábeis.

(w) Reclassificações.

Certas reclassificações foram feitas nos saldos do ano anterior para estar em conformidade com a apresentação do ano atual.

3. Combinações de Negócios.

(a) Aquisições de compra.

Sob os termos dos contratos definitivos relacionados às aquisições de aquisições e aquisições de ativos da Companhia concluídas durante o exercício fiscal de 2008, 2007 e 2006, a remuneração de compra consistia em um ou mais em dinheiro, ações ordinárias da Cisco e opções de ações totalmente adquiridas. assumido.

Um resumo das aquisições de compra e aquisições de ativos concluídas no ano fiscal de 2008, 2007 e 2006 é o seguinte (em milhões):

A contraprestação de compra para aquisições de aquisições da Companhia e aquisições de ativos também é alocada aos ativos tangíveis adquiridos e passivos assumidos.

Fiscal 2008.

A empresa adquiriu a Navini Networks, Inc. para ampliar as soluções WiMAX da empresa para provedores de serviços. A empresa adquiriu a Securent, Inc. para permitir que a empresa oferecesse a seus clientes corporativos soluções de software de gerenciamento de políticas, projetadas para permitir às empresas administrar, fiscalizar e auditar o acesso a dados, comunicações e aplicativos em diferentes tipos de tecnologia da informação. ) ambientes.

Fiscal 2007.

A empresa adquiriu a Arroyo Video Solutions, Inc. para permitir que as operadoras acelerassem a criação e a distribuição de serviços de entretenimento, mídia interativa e publicidade distribuídos pela rede em todo o crescente portfólio de televisores, computadores pessoais e telefones celulares. A empresa adquiriu a IronPort Systems, Inc. para estender o portfólio de segurança da empresa em soluções de segurança de e-mail e mensagens. The Company acquired Reactivity, Inc. to complement and extend the Company’s application networking services portfolio within advanced technologies. The Company acquired WebEx Communications, Inc., a provider of on-demand collaboration applications. WebEx’s network-based solution for delivering business-to-business collaboration extends the Company’s unified communications portfolio, particularly within the small and medium-sized business (SMB) market.

Fiscal 2006.

The Company acquired KiSS Technology A/S to develop networked entertainment products for the consumer. The Company acquired Scientific-Atlanta, Inc. to create an end-to-end solution for carrier networks and the digital home and deliver large-scale video systems to extend Cisco’s commitment to and leadership in the service provider market. The Company acquired Sheer Networks, Inc. to provide technology that is designed to adapt to network changes, scale to large networks, and help extend new technologies and services that simplify the task of monitoring and maintaining complex networks.

The Consolidated Financial Statements include the operating results of each business from the date of acquisition. Pro forma results of operations for the acquisitions other than Scientific-Atlanta completed during fiscal 2008, 2007, and 2006 have not been presented because the effects of the acquisitions, individually or in the aggregate, were not material to the Company’s financial results. The pro forma results of Scientific-Atlanta are presented below.

(b) Acquisition of Scientific-Atlanta, Inc.

On February 24, 2006, Cisco completed the acquisition of Scientific-Atlanta, Inc., a provider of set-top boxes, end-to-end video distribution networks, and video integration systems. The financial information in the table below summarizes the combined results of operations of Cisco and Scientific-Atlanta, on a pro forma basis, as though the companies had been combined as of the beginning of fiscal 2006. The unaudited pro forma financial information combines the historical results of operations of Cisco for fiscal 2006, which include the results of operations of Scientific-Atlanta subsequent to February 24, 2006, and the historical results of operations of Scientific-Atlanta for the six months ended December 30, 2005 and the month ended February 24, 2006.

This information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition of Scientific-Atlanta and issuance of $6.5 billion of debt (see Note 8) had taken place at the beginning of fiscal 2006. The debt was issued to finance the acquisition of Scientific-Atlanta as well as for general corporate purposes. For the purposes of this pro forma financial information, the interest expense on the entire debt, including the effects of hedging, were included in the pro forma financial adjustments. The pro forma financial information also included incremental share-based compensation expense due to the acceleration of Scientific-Atlanta employee stock options prior to the acquisition date, investment banking fees, and other acquisition-related costs, recorded in Scientific-Atlanta’s historical results of operations during February 2006. In addition, the pro forma financial information also included the purchase accounting adjustments on historical Scientific-Atlanta inventory, adjustments to depreciation on acquired property and equipment, a charge for in-process research and development, amortization charges from acquired intangible assets, adjustments to interest income, and related tax effects.

The following table summarizes the pro forma financial information (in millions, except per-share amounts):

(c) Compensation Expense Related to Acquisitions and Investments.

The following table presents the compensation expense related to acquisitions and investments (in millions):

Share-Based Compensation Expense.

Beginning in fiscal 2006, share-based compensation related to acquisitions and investments is measured under SFAS 123(R) and includes deferred share-based compensation relating to acquisitions completed prior to fiscal 2006. As of July 26, 2008, the remaining balance of share-based compensation related to acquisitions and investments to be recognized over the vesting periods was $245 million.

Cash Compensation Expense.

In connection with the Company’s purchase acquisitions, asset purchases, and acquisitions of variable interest entities, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones, or the continued employment with the Company of certain employees of the acquired entities. In each case, any additional amounts paid will be recorded as compensation expense. As of July 26, 2008, the Company may be required to recognize future compensation expense pursuant to these agreements of up to $558 million, including the remaining potential amount of additional compensation expense related to Nuova Systems, Inc., as discussed below.

Nuova Systems, Inc.

During fiscal 2008, the Company purchased the remaining interests in Nuova Systems, Inc. not previously held by the Company, representing approximately 20% of Nuova Systems. Under the terms of the merger agreement, the former minority interest holders of Nuova Systems are eligible to receive up to three milestone payments based on agreed-upon formulas. As a result, during 2008 the Company recorded compensation expense of $277 million related to the fair value of amounts that are expected to be earned by the minority interest holders pursuant to a vesting schedule. Actual amounts payable to the former minority interest holders of Nuova Systems will depend upon achievement under the agreed-upon formulas.

Subsequent changes to the fair value of the amounts probable of being earned and the continued vesting will result in adjustments to the recorded compensation expense. The potential amount that could be recorded as compensation expense may be up to a maximum of $678 million, including the amount that has been expensed as of the end of fiscal 2008. The compensation is expected to be paid during fiscal 2010 through fiscal 2012.

4. Goodwill and Purchased Intangible Assets.

(a) Goodwill.

The following tables present the changes in goodwill allocated to the Company’s reportable segments during fiscal 2008 and 2007 (in millions):

In the table above, “Other” primarily includes foreign currency translation and purchase accounting adjustments.

(b) Purchased Intangible Assets.

The following tables present details of the purchased intangible assets acquired through acquisitions during fiscal 2008 and 2007 (in millions, except years):

The following tables present details of the Company’s purchased intangible assets (in millions):

(1) The technology category for the year ended July 26, 2008 includes technology intangible assets acquired through business combinations as well as technology licenses.

The following table presents the amortization of purchased intangible assets (in millions):

During the years ended July 26, 2008 and July 29, 2006, the Company recorded impairment charges of $33 million and $69 million, respectively, from write-downs of purchased intangible assets primarily related to certain technology and customer relationships due to reductions in expected future cash flows, and the amounts were recorded as amortization of purchased intangible assets.

The estimated future amortization expense of purchased intangible assets as of July 26, 2008, is as follows (in millions):

5. Balance Sheet Details.

The following tables provide details of selected balance sheet items (in millions):

6. Financing Receivables and Guarantees.

(a) Lease Receivables.

Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company’s and complementary third-party products. These lease arrangements typically have terms from two to three years and are generally collateralized by a security interest in the underlying assets. The net lease receivables are summarized as follows (in millions):

Contractual maturities of the gross lease receivables at July 26, 2008 were $655 million in fiscal 2009, $514 million in fiscal 2010, $328 million in fiscal 2011, $160 million in fiscal 2012, and $73 million in fiscal 2013 and thereafter. Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancings, or defaults.

(b) Financed Service Contracts.

Financed service contracts are summarized as follows (in millions):

The revenue related to financed service contracts, which primarily relates to technical support services, is deferred and included in deferred service revenue. The revenue is recognized ratably over the period during which the related services are to be performed, which is typically from one to three years.

(c) Loan Receivables.

Loan receivables are summarized as follows (in millions):

A portion of the revenue related to loan receivables is deferred and included in deferred product revenue based on revenue recognition criteria.

(d) Financing Guarantees.

The Company provides financing guarantees, which are generally for various third-party financing arrangements extended to channel partners and other customers. The Company could be called upon to make payment under these guarantees in the event of nonpayment to the third party. As of July 26, 2008, the total maximum potential future payments related to these guarantees was approximately $830 million, of which approximately $610 million was recorded as deferred revenue on the consolidated balance sheet in accordance with revenue recognition policies and FIN 45.

7. Investments.

(a) Summary of Investments.

The following tables summarize the Company’s investments (in millions):

(b) Gains and Losses on Investments.

The following table presents gross realized gains and losses related to the Company’s investments (in millions):

The following tables present the breakdown of the investments with unrealized losses at July 26, 2008 and July 28, 2007 (in millions):

The gross unrealized losses related to fixed income securities as of July 26, 2008 were primarily due to changes in interest rates and credit market conditions. The gross unrealized losses related to publicly traded equity securities as of July 26, 2008 were due to changes in market prices. The Company’s management has determined that the gross unrealized losses on its investment securities at July 26, 2008 are temporary in nature. The Company reviews its investments to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Substantially all of the Company’s fixed income securities are rated investment grade.

(c) Maturities of Fixed Income Securities.

The following table summarizes the maturities of the Company’s fixed income securities at July 26, 2008 (in millions):

Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

8. Borrowings.

(a) Long-Term Debt.

In February 2006, the Company issued $500 million of senior floating interest rate notes based on LIBOR due 2009 (the “2009 Notes”), $3.0 billion of 5.25% senior notes due 2011 (the “2011 Notes”), and $3.0 billion of 5.50% senior notes due 2016 (the “2016 Notes”), for an aggregate principal amount of $6.5 billion. The following table summarizes the Company’s long-term debt (in millions, except percentages):

Upon termination during fiscal 2008 of the interest rate swaps entered into in connection with the 2011 Notes and the 2016 Notes, the Company received proceeds of $432 million, net of accrued interest, which was recorded as a hedge accounting adjustment of the carrying amount of the fixed-rate debt and which is being amortized as a reduction to interest expense over the remaining terms of the fixed-rate notes. The effective rates for the 2011 Notes and the 2016 Notes as of July 26, 2008 include the fixed rate interest on the notes, the amortization of the hedge accounting adjustment and the accretion of the discount. The effective rates for the 2011 Notes and the 2016 Notes as of July 28, 2007 included the variable rate in effect as of the period end on the interest rate swaps and the accretion of the discount.

The 2011 Notes and the 2016 Notes are redeemable by the Company at any time, subject to a make-whole premium. During fiscal 2008, the Company reclassified the 2009 Notes to the current portion of long-term debt. Based on market prices, the fair value of the Company’s long-term debt, including the current portion of long-term debt, was $6.6 billion as of July 26, 2008. The Company was in compliance with all debt covenants as of July 26, 2008.

Interest is payable quarterly on the 2009 Notes and semi-annually on the 2011 Notes and 2016 Notes. Interest expense and cash paid for interest are summarized as follows (in millions):

(b) Credit Facility.

In August 2007 the Company entered into a credit agreement with certain institutional lenders that provides for a $3.0 billion unsecured revolving credit facility that is scheduled to expire on August 17, 2012. Any advances under the credit agreement will accrue interest at rates that are equal to, based on certain conditions, either (i) the higher of the Federal Funds rate plus 0.50% or Bank of America’s “prime rate” as announced from time to time, or (ii) LIBOR plus a margin that is based on the Company’s senior debt credit ratings as published by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc. The credit agreement requires that the Company maintain an interest coverage ratio as defined in the agreement. As of July 26, 2008, the Company was in compliance with the required interest coverage ratio and the Company had not borrowed any funds under the credit facility. The Company may also, upon the agreement of either the then existing lenders or of additional lenders not currently parties to the agreement, increase the commitments under the credit facility up to a total of $5.0 billion and/or extend the expiration date of the credit facility up to August 15, 2014.

9. Derivative Instruments.

The Company uses derivative instruments primarily to manage exposures to foreign currency, interest rate, and equity security price risks. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency, interest rates, and equity security prices. The Company’s derivatives expose it to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.

(a) Foreign Currency Derivatives.

The Company’s foreign exchange forward and option contracts are summarized as follows (in millions):

The Company conducts business globally in numerous currencies. As such, it is exposed to adverse movements in foreign currency exchange rates. To limit the exposure related to foreign currency changes, the Company enters into foreign currency contracts. The Company does not enter into foreign exchange forward or option contracts for trading purposes.

The Company enters into foreign exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on assets and liabilities such as foreign currency receivables, including long-term customer financings, investments, and payables. Gains and losses on the contracts are included in other income (loss), net, and offset foreign exchange gains and losses from the revaluation of intercompany balances or other current assets, investments, or liabilities denominated in currencies other than the functional currency of the reporting entity. The Company’s foreign exchange forward contracts related to current assets and liabilities generally range from one to three months in original maturity. Additionally, the Company has entered into foreign exchange forward contracts with maturities of up to two years related to long-term customer financings. The foreign exchange forward contracts related to investments generally have maturities of less than two years. The Company also hedges certain net investments in its foreign subsidiaries with forward contracts which generally have maturities of less than six months.

The Company hedges certain foreign currency forecasted transactions related to certain operating expenses with currency options and forward contracts. These currency option and forward contracts generally have maturities of less than 18 months and these transactions are designated as cash flow hedges. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion, if any, of the gain or loss is reported in earnings immediately. During fiscal 2008, 2007, and 2006, there were no significant gains or losses recognized in earnings for hedge ineffectiveness. The Company did not discontinue any hedges during any of the years presented because it was probable that the original forecasted transactions would not occur.

(b) Interest Rate Derivatives.

The Company’s interest rate derivatives are summarized as follows (in millions):

The Company’s primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. To realize these objectives, the Company may utilize interest rate swaps or other derivatives designated as fair value or cash flow hedges.

Interest Rate Swaps, Investments.

The Company is currently a party to $1.0 billion of interest rate swaps designated as fair value hedges of its investment portfolio. Under these interest rate swap contracts, the Company makes fixed-rate interest payments and receives interest payments based on LIBOR. The effect of these swaps is to convert fixed-rate returns to floating-rate returns based on LIBOR for a portion of the Company’s fixed income portfolio. The gains and losses related to changes in the value of the interest rate swaps are included in other income (loss), net, and offset the changes in fair value of the underlying hedged investment. The fair values of the interest rate swaps designated as hedges of the Company’s investments are reflected in prepaid expenses and other current assets or other current liabilities.

Interest Rate Swaps, Long-Term Debt.

In conjunction with its issuance of fixed-rate senior notes in February 2006, the Company entered into $6.0 billion of interest rate swaps designated as fair value hedges of the fixed-rate debt. The effect of these swaps was to convert fixed-rate interest expense to floating-rate interest expense based on LIBOR. During fiscal 2008, the Company terminated the $6.0 billion of interest rate swaps and received proceeds of $432 million, net of accrued interest, which was recorded as a hedge accounting adjustment of the carrying amount of the fixed-rate debt and is amortized as a reduction to interest expense over the remaining terms of the fixed-rate notes. While such interest rate swaps were in effect, their fair values were reflected in other assets or other long-term liabilities and the gains and losses related to changes in the value of such interest rate swaps were included in other income (loss), net, and offset the changes in fair value of the underlying debt.

(c) Equity Derivatives.

The Company’s equity derivatives are summarized as follows (in millions):

The Company maintains a portfolio of publicly traded equity securities which are subject to price risk. The Company may hold equity securities for strategic purposes or to diversify the Company’s overall investment portfolio. To manage its exposure to changes in the fair value of certain equity securities, the Company may enter into equity derivatives, including forward sale and option agreements. As of July 26, 2008, the Company had entered into forward sale agreements on certain publicly traded equity securities designated as fair value hedges. The gains and losses due to changes in the value of the hedging instruments are included in other income (loss), net, and offset the change in the fair value of the underlying hedged investment. The fair values of the equity derivatives are reflected in prepaid expenses and other current assets and other current liabilities.

10. Commitments and Contingencies.

(a) Operating Leases.

The Company leases office space in several U. S. locations. Outside the United States, larger leased sites include sites in Australia, Belgium, Canada, China, France, Germany, India, Israel, Italy, Japan, and the United Kingdom. Rent expense totaled $291 million, $219 million, and $181 million in fiscal 2008, 2007, and 2006, respectively. Future annual minimum lease payments under all noncancelable operating leases with an initial term in excess of one year as of July 26, 2008 are as follows (in millions):

(b) Purchase Commitments with Contract Manufacturers and Suppliers.

The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by the Company or that establish the parameters defining the Company’s requirements. In certain instances, these agreements allow the Company the option to cancel, reschedule, and adjust the Company’s requirements based on its business needs prior to firm orders being placed. Consequently, only a portion of the Company’s reported purchase commitments arising from these agreements are firm, noncancelable, and unconditional commitments. As of July 26, 2008 and July 28, 2007, the Company had total purchase commitments for inventory of $2.7 billion and $2.6 billion, respectively.

In addition to the above, the Company records a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess of its future demand forecasts consistent with the valuation of the Company’s excess and obsolete inventory. As of July 26, 2008 and July 28, 2007, the liability for these purchase commitments was $184 million and $168 million, respectively, and was included in other current liabilities.

(c) Compensation Expense Related to Acquisitions and Investments.

In connection with the Company’s purchase acquisitions, asset purchases, and acquisitions of variable interest entities, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones, or the continued employment with the Company of certain employees of acquired entities. See Note 3.

(d) Other Commitments.

The Company also has certain funding commitments primarily related to its investments in privately held companies and venture funds, some of which are based on the achievement of certain agreed-upon milestones, and some of which are required to be funded on demand. The funding commitments were approximately $359 million and $140 million as of July 26, 2008 and July 28, 2007, respectively.

(e) Variable Interest Entities.

In the ordinary course of business, the Company has investments in privately held companies and provides financing to certain customers through its wholly owned subsidiaries, which may be considered to be variable interest entities. The Company has evaluated its investments in these privately held companies and customer financings and determined that there were no significant unconsolidated variable interest entities as of July 26, 2008.

(f) Guarantees and Product Warranties.

The following table summarizes the activity related to the product warranty liability during fiscal 2008 and 2007 (in millions):

The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, labor costs for technical support staff, and associated overhead. The products sold are generally covered by a warranty for periods ranging from 90 days to five years, and for some products the Company provides a limited lifetime warranty.

In the normal course of business, the Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain similar indemnification obligations to the Company’s agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company’s limited history with prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on the Company’s operating results, financial position, or cash flows.

The Company also provides financing guarantees, which are generally for various third-party financing arrangements to channel partners and other customers. See Note 6. The Company’s other arrangements as of July 26, 2008 that were subject to recognition and disclosure requirements under FIN 45 were not material.

(g) Legal Proceedings.

The Company and other defendants were subject to claims asserted by Telcordia Technologies, Inc. on July 16, 2004 in the Federal District Court for the District of Delaware alleging that various Cisco routers, switches and optical products infringed United States Patent Nos. 4,893,306, 4,835,763, and Re 36,633. Telcordia sought damages and injunctive relief. The Court ruled that, as a matter of law, the Company does not infringe Patent No. 4,893,306. After conclusion of a trial, on May 10, 2007, a jury found that infringement had occurred on the other patents and awarded damages in an amount that is not material to the Company. The Company has asked the Court to reverse the verdict as a matter of law, and if necessary, the Company intends to appeal the decision. Telcordia has asked the Court to enhance damages and award it attorneys’ fees and also has the right to appeal. The Company believes that the ultimate outcome of this matter and aggregate potential damages will not be material.

Brazilian authorities are investigating certain employees of the Company’s Brazilian subsidiary and certain employees of a Brazilian importer of the Company’s products relating to the allegation of evading import taxes and other alleged improper transactions involving the subsidiary and the importer. The Company is conducting a thorough review of the matter. To date, Brazilian authorities have not asserted a claim against the Company. The Company is unable to determine the likelihood of an unfavorable outcome on any potential claims against it or to reasonably estimate a range of loss, if any. In addition, the Company is investigating the allegations regarding improper transactions, the Company has proactively communicated with United States authorities to provide information and report on its findings, and the United States authorities are currently investigating such allegations.

In addition, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including intellectual property litigation. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

11. Shareholders’ Capital próprio.

(a) Stock Repurchase Program.

In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of July 26, 2008, the Company’s Board of Directors had authorized an aggregate repurchase of up to $62 billion of common stock under this program and the remaining authorized repurchase amount was $8.4 billion with no termination date. The stock repurchase activity under the stock repurchase program in fiscal 2007 and 2008 is summarized as follows (in millions, except per-share amounts):

(1) Includes stock repurchases that were pending settlement as of period end.

The purchase price for the shares of the Company’s stock repurchased is reflected as a reduction to shareholders’ equity. In accordance with Accounting Principles Board Opinion No. 6, “Status of Accounting Research Bulletins,” the Company is required to allocate the purchase price of the repurchased shares as (i) a reduction to retained earnings until retained earnings are zero and then as an increase to accumulated deficit and (ii) a reduction of common stock and additional paid-in capital. Issuance of common stock and the tax benefit related to employee stock incentive plans are recorded as an increase to common stock and additional paid-in capital.

(b) Other Repurchases of Common Stock.

The Company also repurchases shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock or stock units.

(c) Preferred Stock.

Under the terms of the Company’s Articles of Incorporation, the Board of Directors may determine the rights, preferences, and terms of the Company’s authorized but unissued shares of preferred stock.

(d) Comprehensive Income.

The components of comprehensive income are as follows (in millions):

The Company consolidates its investment in a venture fund managed by SOFTBANK as the Company is the primary beneficiary as defined under FIN 46(R). As a result, SOFTBANK’s interest in the change in the unrealized gains and losses on the investments in the venture fund is recorded as a component of accumulated other comprehensive income and is reflected as a change in minority interest.

12. Employee Benefit Plans.

(a) Employee Stock Purchase Plan.

The Company has an Employee Stock Purchase Plan, which includes its subplan, the International Employee Stock Purchase Plan (together, the “Purchase Plan”), under which 321.4 million shares of the Company’s stock have been reserved for issuance. Eligible employees may purchase a limited number of shares of the Company’s stock at a discount of up to 15% of the lesser of the market value on the subscription date or the purchase date, which is approximately six months after the subscription date. The Purchase Plan terminates on January 3, 2010. The Company issued 19 million, 17 million, and 21 million shares under the Purchase Plan in fiscal 2008, 2007, and 2006, respectively. As of July 26, 2008, 63 million shares were available for issuance under the Purchase Plan.

(b) Employee Stock Incentive Plans.

Stock Incentive Plan Program Description.

As of July 26, 2008, the Company had five stock incentive plans: the 2005 Stock Incentive Plan (the “2005 Plan”); the 1996 Stock Incentive Plan (the “1996 Plan”); the 1997 Supplemental Stock Incentive Plan (the “Supplemental Plan”); the Cisco Systems, Inc. SA Acquisition Long-Term Incentive Plan (the “SA Acquisition Plan”); and the Cisco Systems, Inc. WebEx Acquisition Long-Term Incentive Plan (the “WebEx Acquisition Plan”). In addition, the Company has, in connection with the acquisitions of various companies, assumed the share-based awards granted under stock incentive plans of the acquired companies or issued share-based awards in replacement thereof. Share-based awards are designed to reward employees for their long-term contributions to the Company and provide incentives for them to remain with the Company. The number and frequency of share-based awards are based on competitive practices, operating results of the Company, government regulations, and other factors. Since the inception of the stock incentive plans, the Company has granted stock options to virtually all employees, and the majority has been granted to employees below the vice president level. The Company’s primary stock incentive plans are summarized as follows:

As amended on November 15, 2007, the maximum number of shares issuable under the 2005 Plan over its term is 559 million shares plus the amount of any shares underlying awards outstanding on November 15, 2007 under the 1996 Plan, the SA Acquisition Plan and the WebEx Acquisition Plan that are forfeited or are terminated for any other reason before being exercised or settled. However, any shares underlying awards outstanding on November 15, 2007 under the 1996 Plan, the SA Acquisition Plan, and the WebEx Acquisition Plan that expire unexercised at the end of their maximum terms will not be considered to become available for reissuance under the 2005 Plan. If any awards granted under the 2005 Plan are forfeited or are terminated for any other reason before being exercised or settled, then the shares underlying the awards will again be available under the 2005 Plan. The number of shares available for issuance under the 2005 Plan will be reduced by 2.5 shares for each share awarded as stock grants or stock units.

The 2005 Plan permits the granting of stock options, stock, stock units, and stock appreciation rights to employees (including employee directors and officers) and consultants of the Company and its subsidiaries and affiliates, and non-employee directors of the Company. Stock options granted under the 2005 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than nine years from the grant date. The stock options will generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Stock grants and stock units will generally vest with respect to 20% or 25% of the shares covered by the grant on each of the first through fifth or fourth anniversaries of the date of the grant, respectively. The Compensation and Management Development Committee of the Board of Directors has the discretion to use different vesting schedules. Stock appreciation rights may be awarded in combination with stock options or stock grants and such awards shall provide that the stock appreciation rights will not be exercisable unless the related stock options or stock grants are forfeited. Stock grants may be awarded in combination with non-statutory stock options, and such awards may provide that the stock grants will be forfeited in the event that the related non-statutory stock options are exercised.

The 1996 Plan expired on December 31, 2006, and the Company can no longer make equity awards under the 1996 Plan. The maximum number of shares issuable over the term of the 1996 Plan was 2.5 billion shares. Stock options granted under the 1996 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than nine years from the grant date. The stock options generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Certain other grants have utilized a 60-month ratable vesting schedule. In addition, the Board of Directors, or other committees administering the plan, have the discretion to use a different vesting schedule and have done so from time to time.

Supplemental Plan.

The Supplemental Plan expired on December 31, 2007, and the Company can no longer make equity awards under the Supplemental Plan. Officers and members of the Company’s Board of Directors were not eligible to participate in the Supplemental Plan. Nine million shares were reserved for issuance under the Supplemental Plan.

Acquisition Plans.

In connection with the Company’s acquisitions of Scientific-Atlanta and WebEx, the Company adopted the SA Acquisition Plan and the WebEx Acquisition Plan, respectively, each effective upon completion of the applicable acquisition. These plans constitute assumptions, amendments, restatements, and renamings of the 2003 Long-Term Incentive Plan of Scientific-Atlanta and the WebEx Communications, Inc. Amended and Restated 2000 Stock Incentive Plan, respectively. The plans permit the grant of stock options, stock, stock units, and stock appreciation rights to certain employees of the Company and its subsidiaries and affiliates who had been employed by Scientific-Atlanta or its subsidiaries or WebEx or its subsidiaries, as applicable. As a result of the shareholder approval of the amendment and extension of the 2005 Plan, as of November 15, 2007, the Company will no longer make stock option grants or direct share issuances under either the SA Acquisition Plan or the WebEx Acquisition Plan.

Dilutive Effect of Stock Options.

Weighted-average basic and diluted shares outstanding for fiscal 2008 were 6.0 billion shares and 6.2 billion shares, respectively. For the year ended July 26, 2008, the dilutive effect of potential common shares was approximately 177 million shares or 3.0% of the basic shares outstanding based on the Company’s average share price of $27.15.

The following table illustrates grant dilution computed based on net stock options granted as a percentage of shares of common stock outstanding at the fiscal year end (in millions, except percentages):

General Share-Based Award Information.

A summary of share-based award activity is as follows (in millions, except per-share amounts):

(1) The total pretax intrinsic value of stock options exercised during fiscal 2008, 2007, and 2006 was $1.6 billion, $3.1 billion and $1.3 billion, respectively.

(2) Amounts represent restricted stock and other share-based awards (excluding stock options) granted and assumed. The Company had total shares of restricted stock and restricted stock units outstanding of 10 million, 11 million, and 6 million as of July 26, 2008, July 28, 2007, and July 29, 2006, respectively. Share-based awards available for grant are reduced by 2.5 shares for each share awarded as stock grants or pursuant to stock units from the 2005 Plan subsequent to November 15, 2007.

The following table summarizes significant ranges of outstanding and exercisable stock options as of July 26, 2008 (in millions, except years and share prices):

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $22.43 as of July 25, 2008, which would have been received by the option holders had those option holders exercised their stock options as of that date. The total number of in-the-money stock options exercisable as of July 26, 2008 was 463 million. As of July 28, 2007, 829 million outstanding stock options were exercisable and the weighted-average exercise price was $30.13.

Valuation and Expense Information Under SFAS 123(R)

Share-based compensation expense recognized under SFAS 123(R) consists primarily of expenses for stock options, stock purchase rights, restricted stock, and restricted stock units granted to employees. The following table summarizes employee share-based compensation expense (in millions):

(1) Share-based compensation expense of $87 million, $34 million, and $87 million related to acquisitions and investments for fiscal 2008, 2007, and 2006, respectively, is disclosed in Note 3 and is not included in the above table.

As of July 26, 2008, total compensation cost related to unvested share-based awards, including share-based compensation relating to acquisitions and investments, not yet recognized was $3.4 billion, which is expected to be recognized over approximately 3.5 years on a weighted-average basis. The income tax benefit for employee share-based compensation expense was $330 million, $342 million, and $294 million for fiscal 2008, 2007, and 2006, respectively.

Lattice-Binomial Model.

Upon adoption of SFAS 123(R) at the beginning of fiscal 2006, the Company began estimating the value of employee stock options and employee stock purchase rights on the date of grant using a lattice-binomial model. Prior to the adoption of SFAS 123(R), the value of each employee stock option and employee stock purchase right was estimated on the date of grant using the Black-Scholes model.

The Company’s employee stock options have vesting provisions and various restrictions including restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity. Lattice-binomial models are more capable of incorporating the features of the Company’s employee stock options than closed-form models such as the Black-Scholes model. The use of a lattice-binomial model requires extensive actual employee exercise behavior data and a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends, kurtosis, and skewness. The weighted-average assumptions, using the lattice-binomial model, and the weighted-average expected life and estimated grant date fair values of employee stock options granted during the respective years and employee stock purchase rights with subscription dates in the respective years are summarized as follows:

The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is impacted by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. The weighted-average assumptions were determined as follows:

For employee stock options, the Company used the implied volatility for two-year traded options on the Company’s stock as the expected volatility assumption required in the lattice-binomial model, consistent with SFAS 123(R) and SAB 107. For employee stock purchase rights, the Company used the implied volatility for six-month traded options on the Company’s stock. The selection of the implied volatility approach was based upon the availability of actively traded options on the Company’s stock and the Company’s assessment that implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company’s employee stock options and employee stock purchase rights. The dividend yield assumption is based on the history and expectation of dividend payouts. The estimated kurtosis and skewness are technical measures of the distribution of stock price returns, which affect expected employee exercise behaviors, and are based on the Company’s stock price return history as well as consideration of various academic analyses.

The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the lattice-binomial model. The expected life of employee stock options is impacted by all of the underlying assumptions and calibration of the Company’s model. The lattice-binomial model assumes that employees’ exercise behavior is a function of the option’s remaining vested life and the extent to which the option is in-the-money. The lattice-binomial model estimates the probability of exercise as a function of these two variables based on the entire history of exercises and cancellations on all past option grants made by the Company.

Accuracy of Fair Value Estimates.

The Company uses third-party analyses to assist in developing the assumptions used in, as well as calibrating, its lattice-binomial model. The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards. The Company’s determination of the fair value of share-based payment awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS 123(R) and SAB 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

(c) Employee 401(k) Plans.

The Company sponsors the Cisco Systems, Inc. 401(k) Plan (the “Plan”) to provide retirement benefits for its employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides for tax-deferred salary contributions for eligible employees. The Plan allows employees to contribute from 1% to 25% of their annual compensation to the Plan on a pretax and after-tax basis. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company matches pretax employee contributions up to 100% of the first 4% of eligible earnings that are contributed by employees. Therefore, the maximum matching contribution that the Company may allocate to each participant’s account will not exceed $9,200 for the 2008 calendar year due to the $230,000 annual limit on eligible earnings imposed by the Internal Revenue Code. All matching contributions vest immediately. The Company’s matching contributions to the Plan totaled $171 million, $131 million, and $96 million in fiscal 2008, 2007, and 2006, respectively.

The Plan allows employees who meet the age requirements and reach the Plan contribution limits to make a catch-up contribution not to exceed the lesser of 50% of their eligible compensation or the limit set forth in the Internal Revenue Code. The catch-up contributions are not eligible for matching contributions. In addition, the Plan provides for discretionary profit-sharing contributions as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants. There were no discretionary profit-sharing contributions made in fiscal 2008, 2007, or 2006.

The Company also sponsors other 401(k) plans that arose from acquisitions of other companies. The Company’s contributions to these plans were not material to the Company on either an individual or aggregate basis for any of the fiscal years presented.

(d) Deferred Compensation Plans.

The Company maintains a deferred compensation plan for certain employees and directors of Scientific-Atlanta (the “SA Plan”). The deferred compensation liability under the SA Plan was approximately $126 million and $109 million, as of July 26, 2008 and July 28, 2007, respectively, and was recorded in current and long-term liabilities.

The Cisco Systems, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), a nonqualified deferred compensation plan, became effective June 25, 2007. As required by applicable law, participation in the Deferred Compensation Plan is limited to a group of the Company’s management employees, which group includes each of the Company’s named executive officers. Under the Deferred Compensation Plan, which is an unfunded and unsecured deferred compensation arrangement, a participant may elect to defer base salary, bonus, and/or commissions, pursuant to such rules as may be established by the Company, up to the maximum percentages for each deferral election as described in the plan. This operates in a manner similar to the way in which the Company’s 401(k) plan operates, but without regard to the maximum deferral limitations imposed on 401(k) plans by the Internal Revenue Code. The Company may also, at its discretion, make a matching contribution to the employee under the Deferred Compensation Plan. A matching contribution equal to 4% of eligible compensation over the Internal Revenue Code limit for calendar year 2008 that is deferred by participants under the Deferred Compensation Plan will be made to eligible participants’ accounts at the end of calendar year 2008. The deferred compensation liability under this plan was approximately $45 million as of July 26, 2008 and was recorded in long-term liabilities.

(e) Defined Benefit Plans Assumed from Scientific-Atlanta.

Upon completion of the acquisition of Scientific-Atlanta, the Company assumed certain defined benefit plans related to employee pensions. Scientific-Atlanta had a defined benefit pension plan covering substantially all of its domestic employees, defined benefit pension plans covering certain international employees, a restoration retirement plan for certain domestic employees, and supplemental executive retirement plans for certain key officers (collectively, the “Pension Plans”).

The fair value of the liabilities of these plans was determined as of the July 26, 2008 and July 28, 2007 measurement dates. The fair value determination of the liabilities reflects the Company’s intent to integrate the Scientific-Atlanta employee benefit programs with those of the Company. As a result, no additional benefits have been accrued under the Pension Plans since February 2008.

The following table sets forth projected benefit obligations, plan assets, and amounts recorded in current and long-term liabilities under the Pension Plans (in millions):

The accumulated benefit obligations under the Pension Plans were $197 million and $225 million as of July 26, 2008 and July 28, 2007, respectively.

13. Income Taxes.

(a) Provision for Income Taxes.

The provision for income taxes consists of the following (in millions):

The Company paid income taxes of $2.8 billion, $1.7 billion, and $1.6 billion in fiscal 2008, 2007, and 2006, respectively. Income before provision for income taxes consists of the following (in millions):

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes consists of the following:

The tax provision for fiscal 2008 included tax expense of $229 million related to the intercompany realignment of certain of the Company’s foreign operations during the third and fourth quarters of fiscal 2008. The tax provision for fiscal 2008 also included a net tax benefit of $162 million related to a settlement of certain tax matters with the IRS during the first quarter of fiscal 2008. In December 2006, the Tax Relief and Health Care Act of 2006 reinstated the U. S. federal R&D tax credit, retroactive to January 1, 2006. As a result, the tax provision for fiscal 2007 included a tax benefit of approximately $60 million related to the U. S. federal R&D tax credit attributable to fiscal 2006 R&D. The tax provision for fiscal 2006 included a benefit of approximately $124 million from the favorable settlement of a tax audit in a foreign jurisdiction.

U. S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on a cumulative total of $21.9 billion of undistributed earnings for certain foreign subsidiaries. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company would be subject to additional U. S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Jobs Creation Act”) was signed into law. The Jobs Creation Act created a temporary incentive for U. S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. In fiscal 2006, the Company distributed cash from its foreign subsidiaries and reported an extraordinary dividend (as defined in the Jobs Creation Act) of $1.2 billion and a related tax liability of approximately $63 million in its fiscal 2006 federal income tax return. This amount was previously provided for in the provision for income taxes and is included in income taxes payable. This distribution does not change the Company’s intention to indefinitely reinvest undistributed earnings of certain of its foreign subsidiaries in operations outside the United States.

As a result of certain employment and capital investment actions and commitments, the Company’s income in certain countries is subject to reduced tax rates and in some cases is wholly exempt from tax. These tax incentives expire in whole or in part at various times through fiscal 2025.

(b) Unrecognized Tax Benefits.

On July 29, 2007, the Company adopted FIN 48 which prescribes a comprehensive model for the financial statement recognition, measurement, classification, and disclosure of uncertain tax positions. As a result of the adoption of FIN 48, the Company reduced the liability for net unrecognized tax benefits by $451 million and accounted for this as a cumulative effect of a change in accounting principle that was recorded as an increase to retained earnings of $202 million and an increase to additional paid-in capital of $249 million. The total amount of gross unrecognized tax benefits as of the date of adoption was $3.3 billion, of which $2.9 billion would affect the effective tax rate if realized. The Company historically classified liabilities for unrecognized tax benefits in current income taxes payable. In implementing FIN 48, the Company has reclassified liabilities for unrecognized tax benefits for which the Company does not anticipate payment or receipt of cash within one year to noncurrent income taxes payable. In addition, the Company reclassified the income tax receivable to income taxes payable.

The aggregate changes in the balance of gross unrecognized tax benefits during fiscal 2008 were as follows (in millions):

In connection with the regular examination of the Company’s federal income tax returns for fiscal years ended July 27, 2002 through July 31, 2004, the IRS proposed certain adjustments related to the Company’s international operations. In the first quarter of fiscal 2008, the Company and the IRS agreed to a settlement with respect to certain tax issues related to U. S. income inclusions arising from the Company’s international operations for fiscal years ended July 27, 2002 through July 29, 2006. As a result of the settlement, the Company reduced the amount of gross unrecognized tax benefits by approximately $1.0 billion. The Company also reduced the amount of accrued interest by $39 million. In addition, the IRS has proposed other adjustments that are not covered under the settlement agreement related to fiscal years ended July 27, 2002 through July 31, 2004. The Company has timely filed a protest with IRS Appeals on these proposed adjustments. The Company believes that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations.

As of July 26, 2008, $2.1 billion of the unrecognized tax benefits would affect the effective tax rate if realized. The Company’s policy to include interest and penalties related to income taxes, including unrecognized tax benefits, within the provision for income taxes did not change as a result of implementing FIN 48. As of the date of adoption of FIN 48, the Company had accrued $183 million in income taxes payable for the payment of interest and penalties. As of July 26, 2008, the Company had accrued $166 million in income taxes payable for the payment of interest and penalties, of which $8 million was recorded to the provision for income taxes during fiscal 2008. The Company is no longer subject to U. S. federal income tax audit for returns covering tax years through fiscal year 2001. With limited exceptions, the Company is no longer subject to state and local or foreign income tax audits for returns covering tax years through fiscal year 1997. Although timing of the resolution of audits is highly uncertain, the Company does not believe it is reasonably possible that the total amount of unrecognized tax benefits as of July 26, 2008 will materially change in the next 12 months.

(c) Deferred Tax Assets and Liabilities.

The following table presents the breakdown between current and noncurrent net deferred tax assets (in millions):

The components of the deferred tax assets and liabilities are as follows (in millions):

As of July 26, 2008, the Company’s federal, state, and foreign net operating loss carryforwards for income tax purposes were $344 million, $1.7 billion, and $97 million, respectively. If not utilized, the federal net operating loss carryforwards will begin to expire in fiscal 2016, the state net operating loss carryforwards will begin to expire in fiscal 2009, and the foreign net operating loss carryforwards will begin to expire in fiscal 2011. As of July 26, 2008, the Company’s federal and state tax credit carryforwards for income tax purposes were approximately $10 million and $600 million, respectively. If not utilized, the federal and state tax credit carryforwards will begin to expire in fiscal 2009.

14. Segment Information and Major Customers.

The Company’s operations involve the design, development, manufacturing, marketing, and technical support of networking and other products and services related to the communications and information technology industry. Cisco products include routers, switches, advanced technologies, and other products. These products, primarily integrated by Cisco IOS Software, link geographically dispersed local-area networks (LANs), metropolitan-area networks (MANs) and wide-area networks (WANs).

(a) Net Sales and Gross Margin by Theater.

The Company conducts business globally and is primarily managed on a geographic basis. The Company’s management makes financial decisions and allocates resources based on the information it receives from its internal management system. Sales are attributed to a geographic theater based on the ordering location of the customer. During the first quarter of fiscal 2008, the Company enhanced its methodology for attributing certain revenue transactions, including revenue deferrals, and the associated cost of sales for each to the respective geographic theater and revised the information utilized by the Company’s chief operating decision maker (CODM). As a result, the Company has reclassified prior year net sales and gross margin amounts by theater to conform to the current year’s presentation.

The Company does not allocate research and development, sales and marketing, or general and administrative expenses to its geographic theaters in this internal management system because management does not include the information in its measurement of the performance of the operating segments. In addition, the Company does not allocate amortization of acquisition-related intangible assets, share-based compensation expense, and the effects of purchase accounting adjustments to inventory to the gross margin for each theater because management also does not include this information in its measurement of the performance of the operating segments.

Summarized financial information by theater for fiscal 2008, 2007, and 2006, based on the Company’s internal management system and as utilized by the Company’s CODM, is as follows (in millions):

(1) Net sales in the United States were $20.2 billion, $18.3 billion, and $14.8 billion for fiscal 2008, 2007, and 2006, respectively.

(2) The unallocated corporate items primarily include the effects of amortization of acquisition-related intangible assets and share-based compensation expense.

(b) Net Sales for Groups of Similar Products and Services.

The following table presents net sales for groups of similar products and services (in millions):

The Company refers to some of its products and technologies as advanced technologies. As of July 26, 2008, the Company had identified the following advanced technologies for particular focus: application networking services, home networking, security, storage area networking, unified communications, video systems, and wireless technology. The Company continues to identify additional advanced technologies for focus and investment in the future, and the Company’s investments in some previously identified advanced technologies may be curtailed or eliminated depending on market developments.

(c) Other Segment Information.

The majority of the Company’s assets, excluding cash and cash equivalents and investments, as of July 26, 2008 and July 28, 2007 were attributable to its U. S. operations. The Company’s total cash and cash equivalents and investments held outside of the United States in various foreign subsidiaries was $24.4 billion as of July 26, 2008, and the remaining $1.8 billion was held in the United States. In fiscal 2008, 2007, and 2006, no single customer accounted for 10% or more of the Company’s net sales.

Property and equipment information is based on the physical location of the assets. The following table presents property and equipment information for geographic areas (in millions):

15. Net Income Per Share.

The following table presents the calculation of basic and diluted net income per share (in millions, except per-share amounts):

Tariffs and Quotas.

6. Demonstrações Financeiras 7. Índices Financeiros 8. Ativos 9. Passivos 10. Bandeiras Vermelhas.

16. Investimentos Alternativos 17. Gestão de Portfólio.

Tariffs are taxes imposed on imported goods; they will increase the price of the good in the domestic market. Domestic producers benefit because they receive higher prices. The government benefits by collecting tax revenues. In the graph below, S 0 and D 0 represent the original supply and demand curves which intersect at (P 0 , Q 0 ). S t shows what the supply curve is with the introduction of the tariff. The market then clears at (P t , Q t ). Less of the good is produced, and consumers pay higher prices.

Quotas are numerical limits imposed on imported goods. Consumers are harmed by quotas, while domestic and foreign producers benefit by receiving higher prices. In the graph below, the market initially clears at P 0 , Q 0 . The supply curve S d+i0 represents the quantity supplied by both domestic and foreign producers before the imposition of the quota. D 0 is the domestic demand curve. After the quota, the supply curve looks like S d+i1 . Both foreign and domestic producers receive higher prices while consumers lose out.

Voluntary Export Restraints (VERs)

These restraints limit the quantity of goods that can be exported from the country to one or more of its trading partners. They are usually "voluntarily" negotiated so that quotas or tariffs are not imposed.

Exchange rate controls set the exchange rate of a nation's currency above the market rate. This makes the nation's exports artificially expensive, which reduces the quantities of the nation's goods that foreigners are willing to buy. This means that the country's citizens have little foreign currency available to buy imported goods. With exchange rate controls, black markets usually exist where currency exchange occurs at a market rate. Exchange rate controls are declining in popularity, although some developing nations still use them.

Hidden methods of limiting imports include special regulations and licensing requirements that restrict imports. For instance, the Japanese government imposes special quality requirements on food to restrict food imports and protect Japanese farmers.

Uses and Limitations of Financial Ratios.

6. Demonstrações Financeiras 7. Índices Financeiros 8. Ativos 9. Passivos 10. Bandeiras Vermelhas.

16. Investimentos Alternativos 17. Gestão de Portfólio.

Benchmarking Financial Ratios.

Financial ratios are not very useful on a stand-alone basis; they must be benchmarked against something. Analysts compare ratios against the following:

There are some important limitations of financial ratios that analysts should be conscious of:

Many large firms operate different divisions in different industries. For these companies it is difficult to find a meaningful set of industry-average ratios. Inflation may have badly distorted a company's balance sheet. In this case, profits will also be affected. Thus a ratio analysis of one company over time or a comparative analysis of companies of different ages must be interpreted with judgment. Seasonal factors can also distort ratio analysis. Understanding seasonal factors that affect a business can reduce the chance of misinterpretation. For example, a retailer's inventory may be high in the summer in preparation for the back-to-school season. As a result, the company's accounts payable will be high and its ROA low. Different accounting practices can distort comparisons even within the same company (leasing versus buying equipment, LIFO versus FIFO, etc.). It is difficult to generalize about whether a ratio is good or not. A high cash ratio in a historically classified growth company may be interpreted as a good sign, but could also be seen as a sign that the company is no longer a growth company and should command lower valuations. A company may have some good and some bad ratios, making it difficult to tell if it's a good or weak company. In general, ratio analysis conducted in a mechanical, unthinking manner is dangerous. On the other hand, if used intelligently, ratio analysis can provide insightful information.

Basic Earnings per Share vs. Diluted Earnings.

How to Analyze an Income Statement.

When analyzing an income statement it's important to know the difference between basic earnings per share (basic EPS) and diluted earnings per share (diluted EPS). This is a particularly important area for stock investors because, if you aren't careful, you can end up using the wrong EPS figure and thus end up with a misleading price-to-earnings ratio, PEG ratio, and dividend-adjusted PEG ratio.

Why Have Two Different Earnings per Share Numbers?

When you dive into the profit and loss statement of a company, you have to do it on two levels.

The first is looking at the entire business. Namely, how profitable is the company as a whole? The second is examining the profits per share. Publicly traded companies are cut up into individual pieces, with each of those pieces representing part of the overall ownership pie. How much of the after-tax income is each individual piece of the company entitled to receive?

For the individual investor, the second figure is what really counts. If a company generates more and more profit each year, but very little of that additional profit makes its way to the shareholders on a per-share basis, the prosperity of the business doesn't mean much, as it could still be a terrible investment. This could happen for a variety of reasons—such as new share issuances for mergers and acquisitions, stock options given to executives, or dilutive securities such as warrants or convertible preferred stock. This is a fairly common problem and one you'll likely discover more often than not.

Truly shareholder-friendly management teams focus on the per-share results, prioritizing them over the size of the company. Such management understands that each time a new share is issued, the existing owners are, in effect, selling some of their current business assets and giving them up to whoever is receiving that share.

Fortunately, the accountants who develop the GAAP rules for financial statements found in the annual report and 10-K filing came up with a solution. It's not perfect, and it won't catch everything, but it's a great place to start. They decided to require companies to present two different earnings per share figures in their disclosures.

Calculating Basic EPS and Diluted EPS.

The two figures required by GAAP are basic EPS and diluted EPS.

The first figure is known as basic EPS . Basic earnings per share is a straightforward, simple calculation that attempts to take the net income applicable to common shares for a period and divide it by the average number of shares outstanding for that same period. For example, if a business had $100,000,000 in net income applicable to common shares for its most recent fiscal year, and it started that year with 20,000,000 shares outstanding and ended that year with 15,000,000 shares outstanding, the basic EPS calculation would be $100,000,000 ÷ ([20,000,000 + 15,000,000] ÷ 2), or $5.71. The second figure is known as diluted EPS . Diluted earnings per share adjusts the basic earnings per share figure by including all potential dilution that, if triggered at present prices and conditions, would result in the reported earnings per share being lower than they otherwise would have been. For example, using our earlier illustration, if there were 5,000,000 shares of stock that could be issued at any time due to a convertible security held by an early investor being eligible for conversion at a price lower than the current market price, the formula would need to account for that. Diluted EPS would be $100,000,000 ÷ ([[20,000,000 + 15,000,000] + 5,000,000] ÷ 2), or $4.44.

Some Thoughts on Using Diluted EPS When Analyzing a Business.

One thing to keep in mind about diluted EPS is the fact that antidilutive conversions are not included in the calculation. Doing so would increase earnings per share, which isn't likely to happen in the real world. (What sane person would exercise an underwater option or convertible security at a price that causes them to pay more than they could get if they went to the open market and bought shares?) This means, for example, that underwater stock options aren't included in the diluted EPS calculation, but stock options that are eligible for conversion and have a strike price below the current market price are.

From a practical standpoint, when you understand these calculations, the implications become clear: If a company has a lot of potential dilution on its books, and the stock price then declines either due to a company-specific situation, a recession, or a broad stock market collapse, all of that dilution could disappear from the diluted EPS calculation.

If you don't account for the fact that higher future stock levels will suddenly reintroduce all of that dilution, your projected earnings could be far off the mark. To some extent, at least as far as stock options go, if the stock price remains depressed for a long period of time, some stock options will expire, but that's usually cold comfort as management is likely to issue itself new stock options at the lower price.

A general rule of thumb to remember is that diluted EPS will always be lower than basic EPS if the company generated a profit, because that profit has to be divided among more shares. Likewise, if a company suffers a loss, diluted EPS will always show a lower loss than basic EPS because the loss is spread out over more shares.

Looking at Intel As an Example.

The figures below are from Intel, a technology company, in the aftermath of the dot-com boom, which demonstrated all of this quite well. Looking at the chart below, notice that in 2000, the difference between Intel's basic EPS and diluted EPS amounted to around $0.06. If you consider that the company had over 6.5 billion shares outstanding, you realize that dilution was taking more than $390 million in value from the investors and giving it to management and employees. That was a huge amount of money. Later, in 2001, as the markets continued to collapse, a lot of the stock options went underwater, and thus the dilution effect evaporated temporarily in the calculation of diluted EPS.