E-Z-GO 2005 Annual Report Download - page 64

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Note 1. Summary of Significant Accounting Policies
Nature of Operations
Textron Inc. (“Textron”) is a global, multi-industry company with manufacturing and finance operations primarily in North America and Europe.
Textron’s principal markets are summarized below by segment:
Segment Principal Markets
Bell • Commercial and military helicopters and tiltrotor aircraft
•Defense and aerospace
•Piston aircraft engines
Cessna • General aviation aircraft
•Business jets including fractional ownership
•Commercial transportation, humanitarian flights, tourism and freight
Industrial • Automotive original equipment manufacturers and other industrial suppliers
•Golf courses, resort communities and municipalities, and commercial and industrial users
•Original equipment manufacturers, governments, distributors and end users of fluid and power systems
•Electrical construction and maintenance, telecommunications and plumbing industries
Finance • Secured commercial loans and leases
Principles of Consolidation and Financial Statement Presentation
The Consolidated Financial Statements include the accounts of Textron Inc. and all of its majority-owned subsidiaries (more than 50%) along
with variable interest entities that are required to be consolidated in accordance with Financial Accounting Standards Board (“FASB”) Interpreta-
tion No. 46, “Consolidation of Variable Interest Entities-Revised” (“FIN 46-R”). FIN 46-R requires the consolidation of variable interest entities in
which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a
result of ownership, contractual or other financial interests in the entity. Variable interest entities are defined as entities with a level of invested
equity insufficient to fund future activities to operate on a standalone basis, or whose equity holders lack certain characteristics of a controlling
financial interest. If an entity does not meet the definition of a variable interest entity under FIN 46-R, Textron accounts for the entity under the pro-
visions of Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” which
requires the consolidation of all majority-owned subsidiaries where the company has the ability to exercise control.
Textron’s financings are conducted through two borrowing groups: Textron Manufacturing and Textron Finance. This framework is designed to
enhance Textron’s borrowing power by separating the Finance segment. To support creditors in evaluating the separate borrowing groups, Textron
presents separate balance sheets and statements of cash flows for each borrowing group. Textron Manufacturing consists of Textron Inc., the par-
ent company, consolidated with the entities that operate in the Bell, Cessna and Industrial business segments. Textron Manufacturing’s cash flows
include dividends received from Textron Finance but exclude its pre-tax income. Textron Finance consists of Textron’s wholly owned commercial
finance subsidiary, Textron Financial Corporation, consolidated with its subsidiaries, which are the entities through which Textron operates its
Finance segment. Textron Finance obtains financing for its operations by borrowing from its own group of external creditors.
A portion of Textron Finance’s business involves financing retail purchases and leases for new and used aircraft and equipment manufactured by
Textron Manufacturing. The cash flows related to these captive financing activities are reflected as operating activities (by Textron Manufacturing)
and as investing activities (by Textron Finance) based on each group’s operations. For example, when product is sold to a customer and financed
by Textron Finance, Textron Finance records the origination of the finance receivable within investing activities as a cash outflow. Textron Manu-
facturing records the cash received from Textron Finance on the customer’s behalf within operating activities. Although cash is transferred
between the businesses, there is no cash transaction for the consolidated group at the time of the original financing. These captive financing
activities, along with all significant intercompany transactions, are eliminated from the Consolidated Financial Statements.
In 2005, Textron has separately disclosed the operating, investing and financing portions of the cash flows attributable to its discontinued
operations, which in prior periods were reported on a combined basis as a single amount. Prior periods have been revised to conform to this
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in these statements and accompanying notes. Some of the more significant estimates include inventory
Notes to the Consolidated Financial Statements
44