Target Corporation prepares its financial statements according to U.S. GAAP. Targets financial statements and disclosure notes for the year ended February 3, 2018, are available in Connect. This material also is available under the Investor Relations link at the companys website (www.target.com). Target does not have investments in stock or bonds. However, CVS Health Corp., which purchased Targets pharmacy and clinical business during 2015, does have some investments. Access CVSs 2017 10K (issued on February 14, 2018) at investors.cvshealth.com to answer the following questions.

Required: 1. CVS indicates in Note 1 that it has some short-term investments that consist of certificates of deposit (CDs). a. How has CVS classified those CDs for accounting purposes? b. Per CVSs balance sheet, what was the balance in CVSs short-term investments as of December 31, 2017, and December 31, 2016? c. Per CVSs statement of cash flows, what cash transactions affected short-term investments during 2017? d. Prepare a T-account that summarizes transactions affecting CVSs short-term investments during 2017. Speculate as to the explanation for any plug figure necessary to make the T-account balance.

2. Per Note 1, CVS has equity-method investments in SureScripts, LLC, and in Heartland Healthcare Services. CVS indicates that those investments are immaterial for the year ended December 31, 2017. Assuming that the Heartland investment is material, a. How would Heartlands earnings affect CVSs income statement? b. How would Heartlands earnings affect CVSs balance sheet?

Consolidated Statements of Operations (millions, except per share data) 2017 As Adjusted(a) 2016 As Adjusted(a) 2018 Sales $74,433 $71,786 $69,414 Other revenue 923 928 857 Total revenue 75,356 72.714 70,271 Cost of sales 53,299 51.125 49.145 Selling, general and administrative expenses 15,723 15,140 14.217 Depreciation and amortization (exclusive of depreciation included in cost of sales) 2.224 2.225 2.045 Operating income 4.110 4,224 4,864 Net interest expense 461 653 991 Net other (income) / expense (27) (59) (88) Earnings from continuing operations before income taxes 3,676 3,630 3.961 Provision for income taxes 746 722 1.295 Net earnings from continuing operations 2,930 2.908 2.666 Discontinued operations, net of tax 7 6 68 Net earnings $2.937 $2.914 $2.734 Net earnings $2.937 $2.914 $2.734 Basic earnings per share Continuing operations $5.54 $5.32 $4.61 0.01 0.01 0.12 Discontinued operations Net earnings per share $5.55 $5.32 $4.73 Diluted earnings per share Continuing operations $5.50 $5.29 $4.58 Discontinued operations 0.01 0.01 0.12 Net earnings per share $5.51 $5.29 $4.69 Weighted average common shares outstanding Basic 528.6 546.8 577.6 Diluted 533.2 550.3 582.5 Antidilutive shares 4.1 0.1 Consolidated Statements of Comprehensive Income (millions) 2017 As Adjusted (a) 2016 As Adjusted (a) 2018 Net earnings $2,937 $2,914 $2.734 Other comprehensive (loss) /income, net of tax Pension and other benefit liabilities, net of tax (52) 2. (13) Currency translation adjustment and cash flow hedges, net of tax (6) 6 4 Other comprehensive (loss) / income (58) 8 (9) Comprehensive income $2.879 $2.922 $2,725 Consolidated Statements of Financial Position (millions, except footnotes) February 2, 2019 February 3, 2018 As Adjusted (a) Assets Cash and cash equivalents $1,556 $2,643 Inventory 9,497 8,597 Other current assets 1,466 1.300 Total current assets 12,519 12,540 Property and equipment Land 6,064 6.095 Buildings and improvements 29.240 28.131 Fixtures and equipment 5.912 5,623 Computer hardware and software 2,544 2,645 Construction-in-progress 460 440 Accumulated depreciation (18,687) (18,398) Property and equipment, net 25,533 24,536 Operating lease assets 1.965 1.884 Other noncurrent assets 1.273 1.343 Total assets $41.290 $40,303 Liabilities and shareholders' investment Accounts payable $9.761 $8,677 Accrued and other current liabilities 4,201 4,094 1,052 281 Current portion of long-term debt and other borrowings Total current liabilities 15,014 13,052 Long-term debt and other borrowings 10.223 11.117 Noncurrent operating lease liabilities 2.004 1.924 Deferred income taxes 972 693 Other noncurrent liabilities 1.780 1,866 Total noncurrent liabilities 14,979 15,600 Shareholders' investment Common stock 43 45 Additional paid-in capital 6,042 5.858 Retained earnings 6,017 6,495 Accumulated other comprehensive loss (805) (747) Total shareholders' investment 11,297 11,651 Total liabilities and shareholders' investment $41,290 $40,303 Consolidated Statements of Income Year Ended December 31, in millions, except per share amounts 2017 2016 2015 $ $ Net revenues Cost of revenues $ 184,765 156,220 28,545 177,526 148.669 28,857 18,491 10,366 1,058 643 153,290 126,762 26,528 17,053 9,475 838 19,028 9,517 1,041 208 28 21 Gross profit Operating expenses Operating profit Interest expense, net Loss on early extinguishment of debt Other expense Income before income tax provision Income tax provision Income from continuing operations Income (oss) from discontinued operations, net of tax Net income Net income attributable to noncontrolling interest Net income attributable to CVS Health 8,637 3,317 8,616 3,386 8,268 1,637 6,631 (8) 5,320 (1) 5,230 9 6,623 5,239 5,319 (2) 5,317 2 $ 6,622 $ $ 5.237 $ 6.48 $ 4.93 $ 4.65 $ $ (0.01) 6.47 1,020 $ $ $ $ 4.93 1,073 0.01 4.66 1,118 Basic earnings per share: Income from continuing operations attributable to CVS Health Income (loss) from discontinued operations attributable to CVS Health Net income attributable to CVS Health Weighted average shares outstanding Diluted earnings per share: Income from continuing operations attributable to CVS Health Income (loss) from discontinued operations attributable to CVS Health Net income attributable to CVS Health Weighted average shares outstanding Dividends declared per share $ 6.45 $ 4.91 $ 4.62 $ $ $ (0.01) 6.44 $ $ $ 4.90 0.01 4.63 1,126 1.40 1,024 2.00 1,079 1.70 S $ $ See accompanying notes to consolidated financial statements. 2017 Annual Report 41 Notes to Consolidated Financial Statements 1 Significant Accounting Policies Description of business CVS Health Corporation and its subsidiaries (the "Company") is the largest integrated pharmacy health care provider in the United States based upon revenues and prescriptions filled. The Company currently has three report- able business segments, Pharmacy Services, Retail/LTC and Corporate, which are described below. Pharmacy Services Segment (the "PSS") The PSS provides a full range of pharmacy benefit management services including plan design offerings and administration, formulary management, Medicare Part D services, mail order, specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease management services and medical spend management. The Company's clients are primarily employers, insurance companies, unions, government employee groups, health plans, Medicare Part D, Managed Medicaid plans, plans offered on the public and private exchanges, and other sponsors of health benefit plans and individuals throughout the United States. As a pharmacy benefits manager, the PSS manages the dispensing of pharmaceuticals through the Company's mail order pharmacies and national network of more than 68,000 retail pharmacies, consisting of approximately 41,000 chain pharmacies and 27,000 independent pharmacies, to eligible members in the benefits plans maintained by the Company's clients and utilizes its information systems to perform, among other things, safety checks, drug interaction screenings and brand to generic substitutions. The PSS' specialty pharmacies support individuals that require complex and expensive drug therapies. The specialty pharmacy business includes mail order and retail specialty pharmacies that operate under the CVS Caremark, CarePlus CVS Pharmacy Navarro Health Services and Advanced Care Scripts ("ACS Pharmacy) names. The Company enhanced its provides specialty infusion services and enteral nutrition services through Coram LLC and its subsidiaries (collectively, "Coram"). In August 2015 the Company further expanded its specialty offerings with the acquisition of ACS Pharmacy which was part of the Omnicare, Inc. ("Omnicare") acquisition. See Note 2 "Acquisitions." The PSS also provides health management programs, which include integrated disease management for 18 conditions, through the Company's AccordantCare rare disease management offering. In addition, through the Company's Silver Script Insurance Company ("Silver Script") subsidiary, the PSS is a national provider of drug benefits to eligible beneficiaries under the federal government's Medicare Part D program. The PSS generates net revenues primarily by contracting with clients to provide prescription drugs to plan members. Prescription drugs are dispensed by the mail order pharmacies, specialty pharmacies and national network of retail pharmacies. Net revenues are also generated by providing additional services to clients, including administrative services such as claims processing and formulary management, as well as health care related services such as disease management. The PSS operates under the CVS Caremark Pharmacy Services, Caremark, CVS Caremark, CVS Specialty. AccordantCare, SilverScript, Wellpartner, Coram, CVS Specialty, NovoLogix, Navarro Health Services and ACS Pharmacy names. As of December 31, 2017, the PSS operates 23 retail specialty pharmacy stores, 18 specialty mail order pharmacies, four mail order dispensing pharmacies, and 83 branches for infusion and enteral services, including approximately 73 ambulatory infusion suites and three centers of excellence, located in 42 states, Puerto Rico and the District of Columbia. Reta TC Segment (the "RLS") The RLS sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, photo finishing services, seasonal merchandise, and greeting cards, through the Company's CVS Pharmacy", CVS, CVS Pharmacy y ms, Longs Drugs, Navarro Discount Pharmacy and Drogaria Onofre retail stores and online through CVS.com, Navarro.com and Onofre.com.br The RLS also provides health care services through its MinuteClinic health care clinics. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions and deliver vaccinations. In 2015, the Company made two larger acquisitions which expanded the Retail/LTC Segment's services. With the acquisition of Omnicare, the RLS began providing long-term care ("LTC") operations, which is comprised of providing the distribution of pharmaceuticals, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings, as well as commercialization services which are provided under the name RxCrossroads ("RxC"). With the December 2015 acquisition of the pharmacies and clinics of Target Corporation ("Target"), the Company added 1,672 pharmacies and approximately 79 clinics. 46 CVS Health As of December 31, 2017, our Retail/LTC Segment included 9,803 retail stores (of which 8,060 were our stores that operated a pharmacy and 1,695 were our pharmacies located within Target stores) located in 49 states, the District of Columbia, Puerto Rico and Brazil operating primarily under the CVS Pharmacy, CVS, CVS Pharmacy y ms, Longs Drugs, Navarro Discount Pharmacy and Drogaria OnofreTM names, 37 onsite pharmacies primarily operating under the CarePlus CVS Pharmacy CarePlus and CVS Pharmacy names, and 1,134 retail health care clinics operating under the MinuteClinic name of which 1.129 were located in our retail pharmacy stores or Target stores), and our online retail websites, CVS.com, Navarro.com and Onofre.com.br". LTC operations are comprised of 145 spoke pharmacies that primarily handle new prescription orders, of which 30 are also hub pharmacies that use proprietary automation to support spoke pharmacies with refill prescriptions. LTC operates primarily under the Omnicare and NeighborCare names. Corporate Segment The Corporate Segment provides management and administrative services to support the Company. The Corporate Segment consists of certain aspects of the Company's executive management, corporate relations, legal, compliance, human resources, information technology and finance departments. Principles of consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and variable interest entities ("VIES") for which the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated. The Company continually evaluates its investments to determine if they represent variable interests in a VIE. If the Company deter- mines that it has a variable interest in a VIE, the Company then evaluates if it is the primary beneficiary of the VIE. The evaluation is a qualitative assessment as to whether the Company has the ability to direct the activities of a VIE that most significantly impact the entity's economic performance. The Company consolidates a VIE if it is considered to be the primary beneficiary. Assets and liabilities of VIEs for which the Company is the primary beneficiary were not significant to the Company's consolidated financial statements. VIE creditors do not have recourse against the general credit of the Company. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Fair value hierarchy The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following: Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 - Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument. Level 3 - Inputs to the valuation methodology are unobservable inputs based upon management's best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk. Cash and cash equivalents Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased. The Company invests in short-term money market funds, commercial paper and time deposits, as well as other debt securities that are classified as cash equivalents within the accompanying consolidated balance sheets, as these funds are highly liquid and readily convertible to known amounts of cash. These investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. Restricted cash As of December 31, 2017 and 2016, the Company had $190 million and $149 million, respectively, of restricted cash held in a trust in its insurance captive to satisfy collateral requirements associated with the assignment of certain insurance policies. Such amounts are included in other assets in the consolidated balance sheets. Additionally, as of December 31, 2017, the Company had $14 million of restricted cash held in escrow accounts in connection with certain recent acquisitions. Such amounts are included in other current assets in the consolidated balance sheets. All restricted cash is invested in time deposits which are classified within Level 1 of the fair value hierarchy. 2017 Annual Report 47 Notes to Consolidated Financial Statements Short-term investments The Company's short-term investments consist of certificates of deposit with initial maturities of greater than three months when purchased that mature in less than one year from the balance sheet date. These investments, which were classified as available-for-sale within Level 1 of the fair value hierarchy, were carried at fair value, which approximated their historical cost at December 31, 2017 and 2016. Fair value of financial instruments As of December 31, 2017, the Company's financial instruments include cash and cash equivalents, short-term and long-term investments, accounts receivable, accounts payable and short-term debt approximate their fair value due to the nature of these financial instruments. The carrying amount and estimated fair value of total long-term debt was $25.7 billion and $26.8 billion, respectively, as of December 31, 2017. The fair value of the Company's long-term debt was estimated based on quoted rates currently offered in active markets for the Company's debt, which is considered Level 1 of the fair value hierarchy. Derivative financial instruments The Company is exposed to interest rate risk and management considers it prudent to periodically reduce the Company's exposure to cash flow variability resulting from interest rate fluctuations. In December 2017, the Company entered into several interest rate swap transactions. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the antici- pated issuance of long-term debt in connection with the proposed acquisition of Aetna Inc. ("Aetna"). The interest rate swaps had notional amounts totaling $4.75 billion. At December 31, 2017, the fair value of these agreements were a $5 million asset recorded other current assets and a $23 million liability recorded in accrued expenses. The fair value of these derivative financia instruments was determined using quoted prices in markets that are not active or inputs that are observable for the asset or liability and therefore they are classified as Level 2 in the fair value hierarchy. The Company has deferred gains and losses in accumulated other comprehensive income which are expected to be reclassified to interest expense over the life of the underlying forecasted debt. The hedges are expected to be highly effective; therefore, no ineffectiveness was recognized in earnings. There were no outstanding derivative financial instruments as of December 31, 2016. Foreign currency translation and transactions For local currency functional currency, assets and liabilities are translated at end-of-period rates while revenues and expenses are translated at average rates in effect during the period. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other compre- hensive income (loss). For U.S. dollar functional currency locations, foreign currency assets and liabilities are remeasured into U.S. dollars at end-of- period exchange rates, except for nonmonetary balance sheet accounts, which are remeasured at historical exchange rates. Revenue and expense are remeasured at average exchange rates in effect during each period, except for those expenses related to the nonmonetary balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in income. Gains and losses arising from foreign currency transactions and the effects of remeasurements were not material for all periods presented. Accounts receivable Accounts receivable are stated net of an allowance for doubtful accounts. The accounts receivable balance primarily includes amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies, governmental agencies and long-term care facilities), clients, members and private pay customers, as well as vendors and manufacturers. Charges to bad debt are based on both historical write-offs and specifically identified receivables. The activity in the allowance for doubtful accounts receivable for the years ended December 31 is as follows: in millions 2017 2016 2015 $ $ $ 256 216 Beginning balance Additions charged to bad debt expense Write-offs charged to allowance Ending balance 286 177 (156) 307 161 221 (96) 286 (311) 161 $ $ $ Inventories Inventories are stated at the lower of weighted average cost or market. Physical inventory counts are taken on a regular basis in each retail store and long-term care pharmacy and a continuous cycle count process is the primary procedure used to validate the inventory balances on hand in each distribution center and mail facility to ensure that the amounts reflected in the accompanying consolidated financial statements are properly stated. During the interim period between physical inventory counts, the Company accrues for anticipated physical inventory losses on a location-by-location basis based on historical results and current trends. 48 CVS Health Consolidated Statements of Operations (millions, except per share data) 2017 As Adjusted(a) 2016 As Adjusted(a) 2018 Sales $74,433 $71,786 $69,414 Other revenue 923 928 857 Total revenue 75,356 72.714 70,271 Cost of sales 53,299 51.125 49.145 Selling, general and administrative expenses 15,723 15,140 14.217 Depreciation and amortization (exclusive of depreciation included in cost of sales) 2.224 2.225 2.045 Operating income 4.110 4,224 4,864 Net interest expense 461 653 991 Net other (income) / expense (27) (59) (88) Earnings from continuing operations before income taxes 3,676 3,630 3.961 Provision for income taxes 746 722 1.295 Net earnings from continuing operations 2,930 2.908 2.666 Discontinued operations, net of tax 7 6 68 Net earnings $2.937 $2.914 $2.734 Net earnings $2.937 $2.914 $2.734 Basic earnings per share Continuing operations $5.54 $5.32 $4.61 0.01 0.01 0.12 Discontinued operations Net earnings per share $5.55 $5.32 $4.73 Diluted earnings per share Continuing operations $5.50 $5.29 $4.58 Discontinued operations 0.01 0.01 0.12 Net earnings per share $5.51 $5.29 $4.69 Weighted average common shares outstanding Basic 528.6 546.8 577.6 Diluted 533.2 550.3 582.5 Antidilutive shares 4.1 0.1 Consolidated Statements of Comprehensive Income (millions) 2017 As Adjusted (a) 2016 As Adjusted (a) 2018 Net earnings $2,937 $2,914 $2.734 Other comprehensive (loss) /income, net of tax Pension and other benefit liabilities, net of tax (52) 2. (13) Currency translation adjustment and cash flow hedges, net of tax (6) 6 4 Other comprehensive (loss) / income (58) 8 (9) Comprehensive income $2.879 $2.922 $2,725 Consolidated Statements of Financial Position (millions, except footnotes) February 2, 2019 February 3, 2018 As Adjusted (a) Assets Cash and cash equivalents $1,556 $2,643 Inventory 9,497 8,597 Other current assets 1,466 1.300 Total current assets 12,519 12,540 Property and equipment Land 6,064 6.095 Buildings and improvements 29.240 28.131 Fixtures and equipment 5.912 5,623 Computer hardware and software 2,544 2,645 Construction-in-progress 460 440 Accumulated depreciation (18,687) (18,398) Property and equipment, net 25,533 24,536 Operating lease assets 1.965 1.884 Other noncurrent assets 1.273 1.343 Total assets $41.290 $40,303 Liabilities and shareholders' investment Accounts payable $9.761 $8,677 Accrued and other current liabilities 4,201 4,094 1,052 281 Current portion of long-term debt and other borrowings Total current liabilities 15,014 13,052 Long-term debt and other borrowings 10.223 11.117 Noncurrent operating lease liabilities 2.004 1.924 Deferred income taxes 972 693 Other noncurrent liabilities 1.780 1,866 Total noncurrent liabilities 14,979 15,600 Shareholders' investment Common stock 43 45 Additional paid-in capital 6,042 5.858 Retained earnings 6,017 6,495 Accumulated other comprehensive loss (805) (747) Total shareholders' investment 11,297 11,651 Total liabilities and shareholders' investment $41,290 $40,303 Consolidated Statements of Income Year Ended December 31, in millions, except per share amounts 2017 2016 2015 $ $ Net revenues Cost of revenues $ 184,765 156,220 28,545 177,526 148.669 28,857 18,491 10,366 1,058 643 153,290 126,762 26,528 17,053 9,475 838 19,028 9,517 1,041 208 28 21 Gross profit Operating expenses Operating profit Interest expense, net Loss on early extinguishment of debt Other expense Income before income tax provision Income tax provision Income from continuing operations Income (oss) from discontinued operations, net of tax Net income Net income attributable to noncontrolling interest Net income attributable to CVS Health 8,637 3,317 8,616 3,386 8,268 1,637 6,631 (8) 5,320 (1) 5,230 9 6,623 5,239 5,319 (2) 5,317 2 $ 6,622 $ $ 5.237 $ 6.48 $ 4.93 $ 4.65 $ $ (0.01) 6.47 1,020 $ $ $ $ 4.93 1,073 0.01 4.66 1,118 Basic earnings per share: Income from continuing operations attributable to CVS Health Income (loss) from discontinued operations attributable to CVS Health Net income attributable to CVS Health Weighted average shares outstanding Diluted earnings per share: Income from continuing operations attributable to CVS Health Income (loss) from discontinued operations attributable to CVS Health Net income attributable to CVS Health Weighted average shares outstanding Dividends declared per share $ 6.45 $ 4.91 $ 4.62 $ $ $ (0.01) 6.44 $ $ $ 4.90 0.01 4.63 1,126 1.40 1,024 2.00 1,079 1.70 S $ $ See accompanying notes to consolidated financial statements. 2017 Annual Report 41 Notes to Consolidated Financial Statements 1 Significant Accounting Policies Description of business CVS Health Corporation and its subsidiaries (the "Company") is the largest integrated pharmacy health care provider in the United States based upon revenues and prescriptions filled. The Company currently has three report- able business segments, Pharmacy Services, Retail/LTC and Corporate, which are described below. Pharmacy Services Segment (the "PSS") The PSS provides a full range of pharmacy benefit management services including plan design offerings and administration, formulary management, Medicare Part D services, mail order, specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease management services and medical spend management. The Company's clients are primarily employers, insurance companies, unions, government employee groups, health plans, Medicare Part D, Managed Medicaid plans, plans offered on the public and private exchanges, and other sponsors of health benefit plans and individuals throughout the United States. As a pharmacy benefits manager, the PSS manages the dispensing of pharmaceuticals through the Company's mail order pharmacies and national network of more than 68,000 retail pharmacies, consisting of approximately 41,000 chain pharmacies and 27,000 independent pharmacies, to eligible members in the benefits plans maintained by the Company's clients and utilizes its information systems to perform, among other things, safety checks, drug interaction screenings and brand to generic substitutions. The PSS' specialty pharmacies support individuals that require complex and expensive drug therapies. The specialty pharmacy business includes mail order and retail specialty pharmacies that operate under the CVS Caremark, CarePlus CVS Pharmacy Navarro Health Services and Advanced Care Scripts ("ACS Pharmacy) names. The Company enhanced its provides specialty infusion services and enteral nutrition services through Coram LLC and its subsidiaries (collectively, "Coram"). In August 2015 the Company further expanded its specialty offerings with the acquisition of ACS Pharmacy which was part of the Omnicare, Inc. ("Omnicare") acquisition. See Note 2 "Acquisitions." The PSS also provides health management programs, which include integrated disease management for 18 conditions, through the Company's AccordantCare rare disease management offering. In addition, through the Company's Silver Script Insurance Company ("Silver Script") subsidiary, the PSS is a national provider of drug benefits to eligible beneficiaries under the federal government's Medicare Part D program. The PSS generates net revenues primarily by contracting with clients to provide prescription drugs to plan members. Prescription drugs are dispensed by the mail order pharmacies, specialty pharmacies and national network of retail pharmacies. Net revenues are also generated by providing additional services to clients, including administrative services such as claims processing and formulary management, as well as health care related services such as disease management. The PSS operates under the CVS Caremark Pharmacy Services, Caremark, CVS Caremark, CVS Specialty. AccordantCare, SilverScript, Wellpartner, Coram, CVS Specialty, NovoLogix, Navarro Health Services and ACS Pharmacy names. As of December 31, 2017, the PSS operates 23 retail specialty pharmacy stores, 18 specialty mail order pharmacies, four mail order dispensing pharmacies, and 83 branches for infusion and enteral services, including approximately 73 ambulatory infusion suites and three centers of excellence, located in 42 states, Puerto Rico and the District of Columbia. Reta TC Segment (the "RLS") The RLS sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, photo finishing services, seasonal merchandise, and greeting cards, through the Company's CVS Pharmacy", CVS, CVS Pharmacy y ms, Longs Drugs, Navarro Discount Pharmacy and Drogaria Onofre retail stores and online through CVS.com, Navarro.com and Onofre.com.br The RLS also provides health care services through its MinuteClinic health care clinics. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions and deliver vaccinations. In 2015, the Company made two larger acquisitions which expanded the Retail/LTC Segment's services. With the acquisition of Omnicare, the RLS began providing long-term care ("LTC") operations, which is comprised of providing the distribution of pharmaceuticals, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings, as well as commercialization services which are provided under the name RxCrossroads ("RxC"). With the December 2015 acquisition of the pharmacies and clinics of Target Corporation ("Target"), the Company added 1,672 pharmacies and approximately 79 clinics. 46 CVS Health As of December 31, 2017, our Retail/LTC Segment included 9,803 retail stores (of which 8,060 were our stores that operated a pharmacy and 1,695 were our pharmacies located within Target stores) located in 49 states, the District of Columbia, Puerto Rico and Brazil operating primarily under the CVS Pharmacy, CVS, CVS Pharmacy y ms, Longs Drugs, Navarro Discount Pharmacy and Drogaria OnofreTM names, 37 onsite pharmacies primarily operating under the CarePlus CVS Pharmacy CarePlus and CVS Pharmacy names, and 1,134 retail health care clinics operating under the MinuteClinic name of which 1.129 were located in our retail pharmacy stores or Target stores), and our online retail websites, CVS.com, Navarro.com and Onofre.com.br". LTC operations are comprised of 145 spoke pharmacies that primarily handle new prescription orders, of which 30 are also hub pharmacies that use proprietary automation to support spoke pharmacies with refill prescriptions. LTC operates primarily under the Omnicare and NeighborCare names. Corporate Segment The Corporate Segment provides management and administrative services to support the Company. The Corporate Segment consists of certain aspects of the Company's executive management, corporate relations, legal, compliance, human resources, information technology and finance departments. Principles of consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and variable interest entities ("VIES") for which the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated. The Company continually evaluates its investments to determine if they represent variable interests in a VIE. If the Company deter- mines that it has a variable interest in a VIE, the Company then evaluates if it is the primary beneficiary of the VIE. The evaluation is a qualitative assessment as to whether the Company has the ability to direct the activities of a VIE that most significantly impact the entity's economic performance. The Company consolidates a VIE if it is considered to be the primary beneficiary. Assets and liabilities of VIEs for which the Company is the primary beneficiary were not significant to the Company's consolidated financial statements. VIE creditors do not have recourse against the general credit of the Company. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Fair value hierarchy The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following: Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 - Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument. Level 3 - Inputs to the valuation methodology are unobservable inputs based upon management's best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk. Cash and cash equivalents Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased. The Company invests in short-term money market funds, commercial paper and time deposits, as well as other debt securities that are classified as cash equivalents within the accompanying consolidated balance sheets, as these funds are highly liquid and readily convertible to known amounts of cash. These investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. Restricted cash As of December 31, 2017 and 2016, the Company had $190 million and $149 million, respectively, of restricted cash held in a trust in its insurance captive to satisfy collateral requirements associated with the assignment of certain insurance policies. Such amounts are included in other assets in the consolidated balance sheets. Additionally, as of December 31, 2017, the Company had $14 million of restricted cash held in escrow accounts in connection with certain recent acquisitions. Such amounts are included in other current assets in the consolidated balance sheets. All restricted cash is invested in time deposits which are classified within Level 1 of the fair value hierarchy. 2017 Annual Report 47 Notes to Consolidated Financial Statements Short-term investments The Company's short-term investments consist of certificates of deposit with initial maturities of greater than three months when purchased that mature in less than one year from the balance sheet date. These investments, which were classified as available-for-sale within Level 1 of the fair value hierarchy, were carried at fair value, which approximated their historical cost at December 31, 2017 and 2016. Fair value of financial instruments As of December 31, 2017, the Company's financial instruments include cash and cash equivalents, short-term and long-term investments, accounts receivable, accounts payable and short-term debt approximate their fair value due to the nature of these financial instruments. The carrying amount and estimated fair value of total long-term debt was $25.7 billion and $26.8 billion, respectively, as of December 31, 2017. The fair value of the Company's long-term debt was estimated based on quoted rates currently offered in active markets for the Company's debt, which is considered Level 1 of the fair value hierarchy. Derivative financial instruments The Company is exposed to interest rate risk and management considers it prudent to periodically reduce the Company's exposure to cash flow variability resulting from interest rate fluctuations. In December 2017, the Company entered into several interest rate swap transactions. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the antici- pated issuance of long-term debt in connection with the proposed acquisition of Aetna Inc. ("Aetna"). The interest rate swaps had notional amounts totaling $4.75 billion. At December 31, 2017, the fair value of these agreements were a $5 million asset recorded other current assets and a $23 million liability recorded in accrued expenses. The fair value of these derivative financia instruments was determined using quoted prices in markets that are not active or inputs that are observable for the asset or liability and therefore they are classified as Level 2 in the fair value hierarchy. The Company has deferred gains and losses in accumulated other comprehensive income which are expected to be reclassified to interest expense over the life of the underlying forecasted debt. The hedges are expected to be highly effective; therefore, no ineffectiveness was recognized in earnings. There were no outstanding derivative financial instruments as of December 31, 2016. Foreign currency translation and transactions For local currency functional currency, assets and liabilities are translated at end-of-period rates while revenues and expenses are translated at average rates in effect during the period. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other compre- hensive income (loss). For U.S. dollar functional currency locations, foreign currency assets and liabilities are remeasured into U.S. dollars at end-of- period exchange rates, except for nonmonetary balance sheet accounts, which are remeasured at historical exchange rates. Revenue and expense are remeasured at average exchange rates in effect during each period, except for those expenses related to the nonmonetary balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in income. Gains and losses arising from foreign currency transactions and the effects of remeasurements were not material for all periods presented. Accounts receivable Accounts receivable are stated net of an allowance for doubtful accounts. The accounts receivable balance primarily includes amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies, governmental agencies and long-term care facilities), clients, members and private pay customers, as well as vendors and manufacturers. Charges to bad debt are based on both historical write-offs and specifically identified receivables. The activity in the allowance for doubtful accounts receivable for the years ended December 31 is as follows: in millions 2017 2016 2015 $ $ $ 256 216 Beginning balance Additions charged to bad debt expense Write-offs charged to allowance Ending balance 286 177 (156) 307 161 221 (96) 286 (311) 161 $ $ $ Inventories Inventories are stated at the lower of weighted average cost or market. Physical inventory counts are taken on a regular basis in each retail store and long-term care pharmacy and a continuous cycle count process is the primary procedure used to validate the inventory balances on hand in each distribution center and mail facility to ensure that the amounts reflected in the accompanying consolidated financial statements are properly stated. During the interim period between physical inventory counts, the Company accrues for anticipated physical inventory losses on a location-by-location basis based on historical results and current trends. 48 CVS Health