## Notes to Consolidated Financial Statements 

## 1 . THE COMPANY 

Nu Skin Enterprises, Inc. (the “Company”) is a leading, global direct selling company that develops and distributes pre- mium quality, innovative personal care products and nutritional supplements that are sold worldwide under the Nu Skin and Pharmanex brands. The Company also markets technology-related products and services under the Big Planet brand. The Company reports revenue from five geographic regions: North Asia, which consists of Japan and South Korea; Greater China, which consists of China, Hong Kong and Taiwan; North America, which consists of the United States and Canada; South Asia/Pacific, which consists of Australia, Brunei, Malaysia, New Zealand, the Philippines, Singapore and Thailand; and Other Markets, which consists of Brazil, Europe, Guatemala, Israel, and Mexico (the Company’s subsidiaries operating in these countries are collectively referred to as the “Subsidiaries”). 

## 2 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

## Consolidation 

The consolidated financial statements include the accounts of the Company and the Subsidiaries. All significant intercom- pany accounts and transactions are eliminated in consolidation. 

## Use of estimates 

The preparation of these financial statements in conformity with accounting principles generally accepted in the United States required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of rev- enue and expenses during the reporting period. Significant estimates include reserves for product returns, obsolete inven- tory, and taxes. Actual results could differ from these estimates. 

## Cash and cash equivalents 

Cash equivalents are short-term, highly liquid instruments with original maturities of 90  days or less. 

## Reclassifications 

Certain reclassifications have been made to prior-year balances in order to conform to the current year presentation. 

## Current investments 

Current investments consist entirely of auction rate municipal bonds classified as available-for-sale securities. The Com- pany, through its dealers, purchases and sells these securities at par value, and records them at cost, which approximates fair market value due to their variable interest rates, which typically reset every 7  to 35  days, and despite the long-term nature of their stated contractual maturities, along with the Company’s investment policy and practice to only invest in high investment grade securities, the Company has the ability to quickly liquidate these securities. As a result, the Com- pany has no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from its current investments. Interest income generated from these current investments is recorded in other income. 

Prior to December 31 , 2004 , such investments had been classified as cash and cash equivalents. As of December 31 , 2004 , the Company has revised its classification to report these securities as current investments in a separate line item on its consolidated balance sheet. The Company has also made corresponding adjustments to its consolidated statement of cash flows for all periods presented, to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. 

## Inventories 

Inventories consist primarily of merchandise purchased for resale and are stated at the lower of cost or market, using the first-in, first-out method. The Company had reserves for obsolete inventory totaling $ 5 . 7  million, $ 5 . 4  million and $ 5 . 2  million as of December 31 , 2002 , 2003  and 2004 , respectively. 

