Sunoco 2005 Annual Report Download - page 49

Notes to Consolidated Financial Statements Sunoco, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of Sunoco, Inc.
and subsidiaries (collectively, “Sunoco” or the
“Company”) contain the accounts of all entities that are
controlled and variable interest entities for which the
Company is the primary beneficiary. Corporate joint ven-
tures and other investees over which the Company has
the ability to exercise significant influence that are not
consolidated are accounted for by the equity method.
FASB Interpretation No. 46, “Consolidation of Variable
Interest Entities,” as revised (“FASB Interpretation
No. 46”), defines a variable interest entity (“VIE”) as an
entity that either has investor voting rights that are not
proportional to their economic interests or has equity
investors that do not provide sufficient financial resources
for the entity to support its activities. FASB Interpretation
No. 46 requires a VIE to be consolidated by a company if
that company is the primary beneficiary. The primary
beneficiary is the company that is subject to a majority of
the risk of loss from the VIE’s activities or, if no company
is subject to a majority of such risk, the company that is
entitled to receive a majority of the VIE’s residual returns.
Use of Estimates
The preparation of financial statements in conformity
with U.S. generally accepted accounting principles re-
quires management to make estimates and assumptions
that affect the amounts reported in the financial state-
ments and accompanying notes. Actual amounts could
differ from these estimates.
Stock Split
Share and per-share data (except par value) presented for
all periods reflect the effect of a two-for-one stock split,
which was effected in the form of a common stock divi-
dend distributed on August 1, 2005 (Note 14).
Reclassifications
Certain amounts in the prior years’ financial statements
have been reclassified to conform to the current-year
presentation.
Revenue Recognition
The Company sells various refined products (including
gasoline, middle distillates, residual fuel, petrochemicals
and lubricants), coke and coal and also sells crude oil in
connection with the crude oil gathering and marketing
activities of its logistics operations. In addition, the
Company sells a broad mix of merchandise such as gro-
ceries, fast foods and beverages at its convenience stores,
operates common carrier pipelines through a publicly
traded limited partnership, provides terminalling services
and provides a variety of car care services at its retail
gasoline outlets. Revenues related to the sale of products
are recognized when title passes, while service revenues
are recognized when services are provided. Title passage
generally occurs when products are shipped or delivered
in accordance with the terms of the respective sales
agreements. In addition, revenues are not recognized un-
til sales prices are fixed or determinable and collectibility
is reasonably assured.
Crude oil and refined product exchange transactions,
which are entered into primarily to acquire crude oil and
refined products of a desired quality or at a desired loca-
tion, are netted in cost of products sold and operating
expenses in the consolidated statements of income. In
September 2005, the Emerging Issues Task Force (the
“EITF”) completed its deliberations on whether exchange
transactions should be reported on a gross or net basis in
Issue 04-13, “Accounting for Purchases and Sales of In-
ventory with the Same Counterparty,” and concluded
that they should be reported net in the consolidated
statements of income. Accordingly, no adjustment of the
amounts included in Sunoco’s consolidated financial
statements was required.
Consumer excise taxes on sales of refined products and
merchandise are included in both revenues and costs and
expenses, with no effect on net income.
Cash Equivalents
Sunoco considers all highly liquid investments with a
remaining maturity of three months or less at the time of
purchase to be cash equivalents. These cash equivalents
consist principally of time deposits and money market
investments.
Inventories
Inventories are valued at the lower of cost or market. The
cost of crude oil and petroleum and chemical product
inventories is determined using the last-in, first-out
method (“LIFO”). The cost of materials, supplies and
other inventories is determined using principally the
average-cost method.
47