Cisco Systems, Inc., reports the following in the Commitments and Contingencies note to their 10-K for the year ended July 2018. Purchase Commitments with Contract Manufacturers and Suppliers:
We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by us or establish the parameters defining our requirements. A significant portion of our reported purchase commitments arising from these agreements consists of firm, noncancelable, and unconditional commitments. Certain of these purchase commitments with contract manufacturers and suppliers relate to arrangements to secure long-term pricing for certain product components for multi-year periods. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed.
The following table summarizes our purchase commitments with contract manufacturers and suppliers (in millions):
We record a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. As of July 28, 2018 and July 29, 2017, the liability for these purchase commitments was $159 million and $162 million, respectively, and was included in other current liabilities.
a. What effect does the use of contract manufacturers have on Cisco’s balance sheet?
b. Assuming an interest rate of 4% and payments due in 2 years ($710 million) and 4 years ($360 million), what is the present value of these commitments as of July 2018?
c. What amount does Cisco state that it has accrued as of July 2018?
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