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## NOTE 1—SIGNIFICANT ACCOUNTING POLICIES 

Consolidation. The consolidated financial statements include the accounts of The Sherwin-Williams Compa- ny, its wholly-owned subsidiaries and its majority- owned equity investments. Inter-company accounts and transactions have been eliminated. 

Use of estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those amounts. 

Nature of operations. The Company is engaged in the manufacture, distribution and sale of coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America. 

## Reportable segments. See Note 18. 

Cash flows. Management considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 

Fair value of financial instruments. The following methods and assumptions were used to estimate the fair value disclosures for financial instruments: 

Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate fair value. 

Investments in securities: Two separate funds main- tained for payment of certain employee benefits include investments that are classified as available for sale securities. The fair values of such investments, based on quoted market prices, included in a health care benefits fund reported in Other current assets were $3, $827 and $4,092 at December 31, 2004, 2003 and 

2002, respectively. The fair values of such investments, based on quoted market prices, included in a non- qualified benefits fund reported in Other assets were $9,853 and $20,643 at December 31, 2004 and 2003, respectively. There were no available for sale invest- ments in this fund at December 31, 2002. The fair values of other investments, based on quoted market prices, included in a non-qualified benefits fund report- ed in Other assets were $6,568, $1,910 and $18,560 at December 31, 2004, 2003 and 2002. 

Non-traded investments: The Company has invested in the U.S. affordable housing and historic renovation real estate markets. These investments have been identified as variable interest entities. However, the Company is not the primary benefici- ary and does not consolidate the operations of the investments in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities.” The Company’s risk of loss from these non-traded invest- ments is limited to the amount of its contributed capital. The carrying amounts of these non-traded investments, included in Other assets, were $24,356, $20,695 and $11,117 at December 31, 2004, 2003 and 2002, respectively. The carrying amounts of these investments, which approximate market value, are determined based on cost less related income tax credits determined by the effective yield method. 

Short-term borrowings: The carrying amounts reported in the consolidated balance sheets for short- term borrowings approximate fair value. 

Long-term debt (including current portion): The fair values of the Company’s publicly traded debt, shown below, are based on quoted market prices. The fair values of the Company’s non-traded debt, also shown below, are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. See Note 8. 

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