Western Digital Corporation 2012 Annual Report Page 64

WESTERN DIGITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Fair Value of Financial Instruments

The carrying amounts of cash equivalents, accounts receivable, investments, accounts payable and accrued

expenses approximate fair value for all periods presented because of the short-term maturity of these assets and
liabilities or, in the case of investments, these are recorded using appropriate market information. The carrying
amount of debt approximates fair value because of its variable interest rate.

Concentration of Credit Risk

The Company sells its products to computer manufacturers, resellers and retailers throughout the world. The

Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collater-
al. The Company maintains allowances for potential credit losses, and such losses have historically been within
management's expectations. At any given point in time, the total amount outstanding from any one of a number of its
customers may be individually significant to the Company's financial results. At June 29, 2012 and July 1, 2011, the
Company had reserves for potential credit losses of $9 million and $5 million, respectively, and net accounts receiv-
able of $2.4 billion and $1.2 billion, respectively.

The Company also has cash equivalent and investment policies that limit the amount of credit exposure to any

one financial institution or investment instrument and requires that investments be made only with financial
institutions or in investment instruments evaluated as highly credit-worthy.

Inventories

The Company values inventories at the lower of cost (first-in, first out and weighted average methods) or net

realizable value. The first-in, first-out ("FIFO") method is used to value the cost of the majority of the Company's
inventories, while the weighted-average method is used to value precious metal inventories. Weighted-average cost is
calculated based upon the cost of precious metals at the time they are received by the Company. The Company has
determined that it is not practicable to assign specific costs to individual units of precious metals and, as such, pre-
cious metals are relieved from inventory based on the weighted-average cost of the inventory at the time the inventory
is used in production. The weighted average method of valuing precious metals does not materially differ from a FIFO
method. As of June 29, 2012 and July 1, 2011, 89% and 85%, respectively, of the inventory was valued using the
FIFO method with the remainder valued using the weighted average method. Inventory write-downs are recorded for
the valuation of inventory at the lower of cost or net realizable value by analyzing market conditions and estimates of
future sales prices as compared to inventory costs and inventory balances.

The Company evaluates inventory balances for excess quantities and obsolescence on a regular basis by analyzing

estimated demand, inventory on hand, sales levels and other information, and reduces inventory balances to net realiz-
able value for excess and obsolete inventory based on this analysis. Unanticipated changes in technology or customer
demand could result in a decrease in demand for one or more of the Company's products, which may require a write
down of inventory that could materially affect operating results.

Property, Plant and Equipment

The cost of property, plant and equipment is depreciated over the estimated useful lives of the respective assets.

The Company's buildings are depreciated over periods ranging from fifteen to thirty years. The majority of the
Company's equipment is depreciated over periods of three to seven years. Depreciation is computed on a straight-line
basis. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related
lease terms.

Goodwill and Other Long-Lived Assets

The fair value of assets acquired and liabilities assumed in a business acquisition are recognized at the acquisition

date, with amounts exceeding the fair values being recognized as goodwill. Goodwill is not amortized. Instead, it is