Avid 1997 Annual Report Download - page 36

29
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or fewer to
be cash equivalents. Cash equivalents consist primarily of taxable and tax-exempt money market funds, bankers'
acceptances, short-term time deposits, short-term government obligations, and commercial paper.
Marketable Securities
Marketable securities consist primarily of state and municipal bonds and commercial paper. Certain of these marketable
securities with maturities in excess of one year are classified as long-term investments in marketable securities. The
Company has classified its debt securities as "available for sale,” and reports them at fair value, with unrealized gains and
losses excluded from earnings and reported as an adjustment to stockholders' equity.
Inventories
Inventories, principally purchased components, are stated at the lower of cost (determined on a first-in, first-out basis) or
market value. Inventory in the digital media market, including the Company’s inventory, is subject to rapid technological
change or obsolescence; therefore utilization of existing inventory may differ from the Company’s estimates.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of the
asset. Leasehold improvements are amortized over the shorter of the useful life of the improvement or the remaining term
of the lease. Expenditures for maintenance and repairs are expensed as incurred. Upon retirement or other disposition of
assets, the cost and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is
reflected in income. A significant portion of the property and equipment is subject to rapid technological obsolescence; as a
result, the depreciation and amortization periods could ultimately shorten to reflect the change in future technology.
Revenue Recognition
Revenue is recognized upon product shipment, provided that no significant vendor obligations remain outstanding and the
resulting receivable is deemed collectible by management. In instances where product is shipped with the commitment to
provide a future upgrade or extended installation services, the Company will defer the revenue related to the upgrade or
installation services. In addition, the Company may offer rebates on certain products from time to time which are accounted
for as offsets to revenues upon shipment. Maintenance revenue is recognized ratably over the term of the maintenance
agreement. Service revenue, principally training, is recognized as the services are provided. Included in accounts receivable
allowances are sales allowances provided for expected returns and credits and an allowance for bad debts.
Warranty Expense
The Company provides a warranty reserve at the time of sale for the estimated costs to repair or replace defective hardware
products.
Research and Development Costs
Research and development costs are expensed as incurred except for costs of internally developed or externally purchased
software that qualify for capitalization. Capitalized costs are amortized using the straight-line method upon general release,
over the expected life of the related products, generally 12 to 24 months. The straight-line method generally results in
approximately the same amount of expense as that calculated using the ratio that current period gross product revenues bear
to total anticipated gross product revenues. The Company evaluates the net realizable value of capitalized software on an
ongoing basis, relying on a number of business and economic factors which could result in shorter amortization periods.
Computation of Net Income (Loss) Per Common Share
Net income per common share is presented for both basic earnings per share (“Basic EPS”) and diluted earnings per share
(“Diluted EPS”). Basic EPS is based upon the weighted average number of common shares outstanding during the period.
Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the
period. Common stock equivalent shares are included in the Diluted EPS calculation where the effect of their inclusion
would be dilutive. Net loss per common share, both basic and dilutive, is based upon the weighted average number of
common shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding
stock options, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the
treasury stock method.