Baker Hughes 2013 Annual Report Download - page 82

2013 Annual Report 52
Baker Hughes Incorporated
Notes to Consolidated Financial Statements
Research and Engineering
Research and engineering expenses are expensed as incurred and include costs associated with the research
and development of new products and services and costs associated with sustaining engineering of existing
products and services. Costs for research and development of new products and services were $370 million, $337
million and $324 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Cash, Cash Equivalents and Short-term Investments
Cash equivalents include only those investments with an original maturity of three months or less. Short-term
investments have an original maturity of greater than three months but less than one year. We maintain cash
deposits with financial institutions that may exceed federally insured limits. We monitor the credit ratings and our
concentration of risk with these financial institutions on a continuing basis to safeguard our cash deposits.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts based on various factors including historical experience,
current aging status of the customer accounts, and the payment history and financial condition of our customers.
Provisions for doubtful accounts are recorded when it becomes evident that the customer will not make the required
payments at either contractual due dates or in the future. Provision for doubtful accounts recorded in cost of sales
was $75 million, $100 million and $84 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Concentration of Credit Risk
We grant credit to our customers, which operate primarily in the oil and natural gas industry. Although this
concentration could affect our overall exposure to credit risk, we believe that our risk is minimized because the
majority of our business is conducted with major companies many of which are geographically diverse, thus
spreading the credit risk. To manage this risk, we perform periodic credit evaluations of our customers’ financial
condition, including monitoring our customers’ payment history and current credit worthiness. We do not generally
require collateral in support of our trade receivables, but we may require payment in advance or security in the form
of a letter of credit or bank guarantee. During 2013, 2012 and 2011, no individual customer accounted for more
than 10% of our consolidated revenue.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”)
method or the average cost method, which approximates FIFO, and includes the cost of materials, labor and
manufacturing overhead. As necessary, we record provisions and maintain reserves for excess, slow moving and
obsolete inventory. To determine these reserve amounts, we regularly review inventory quantities on hand and
compare them to estimates of future product demand, market conditions, production requirements and
technological developments.
Property, Plant and Equipment and Accumulated Depreciation
Property, plant and equipment (“PP&E”) is stated at cost less accumulated depreciation, which is generally
provided by using the straight-line method over the estimated useful lives of the individual assets. Significant
improvements and betterments are capitalized if they extend the useful life of the asset. We manufacture a
substantial portion of our tools and equipment and the cost of these items, which includes direct and indirect
manufacturing costs, is capitalized and carried in inventory until it is completed. When complete, the cost is
reflected in capital expenditures and is classified as machinery, equipment and other in PP&E. Maintenance and
repairs are charged to expense as incurred. Upon sale or other disposition, the applicable amounts of asset cost
and accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from
disposal, is charged or credited to income. The capitalized costs of computer software developed or purchased for
internal use are classified in machinery, equipment and other.