E-Z-GO 2007 Annual Report Download - page 64

Notes to the Consolidated Financial Statements
Note 1. Summary of Signifi cant Accounting Policies
Principles of Consolidation and Financial Statement Presentation
Our Consolidated Financial Statements include the accounts of Textron Inc. and all of its majority-owned subsidiaries, along with variable interest
entities for which we are the primary benefi ciary.
Our fi nancings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc., consolidated with the
entities that operate in the Bell, Cessna and Industrial segments, while the Finance group consists of the Finance segment, comprised of Textron
Financial Corporation and its subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our
Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group
provides fi nancial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts
use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash fl ow information
for each borrowing group within the Consolidated Financial Statements.
Through our Finance group, we provide diversifi ed commercial fi nancing to third parties. In addition, this group fi nances retail purchases and
leases for new and used aircraft and equipment manufactured by our Manufacturing group, otherwise known as captive fi nancing. In the
Consolidated Statements of Cash Flows, cash received from customers or from securitizations is refl ected as operating activities when received
from third parties. However, in the cash fl ow information provided for the separate borrowing groups, cash fl ows related to captive fi nancing
activities are refl ected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and
is fi nanced by the Finance group, the origination of the fi nance receivable is recorded within investing activities as a cash outfl ow in the Finance
group’s statement of cash fl ows. Meanwhile, in the Manufacturing group’s statement of cash fl ows, the cash received from the Finance group on
the customer’s behalf is recorded within operating cash fl ows as a cash infl ow. Although cash is transferred between the two borrowing groups,
there is no cash transaction reported in the consolidated cash fl ows at the time of the original fi nancing. These captive fi nancing activities, along
with all signifi cant intercompany transactions, are reclassifi ed or eliminated in consolidation.
In July 2007, our Board of Directors approved a two-for-one split of our common stock. The fi nancial statements for all prior periods presented
have been restated to refl ect the effect of the split on share and per share amounts.
Use of Estimates
We prepare our fi nancial statements in conformity with generally accepted accounting principles, which require us to make estimates and
assumptions that affect the amounts reported in the fi nancial statements. Estimates are used in accounting for, among other items, long-term
contracts, inventory valuation, residual values of leased assets, allowance for credit losses on receivables, the amount and timing of future cash
fl ows expected to be received on impaired loans, product liability, workers’ compensation, actuarial assumptions for the pension and
postretirement plans, future cash fl ows associated with goodwill and long-lived asset valuations, and environmental and warranty reserves. Our
estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic
conditions and trends, and our assessments of the probable future outcomes of these matters. Actual results could differ from those estimates.
Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are refl ected in the statement of operations in the period
that they are determined.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less.
Revenue Recognition
We generally recognize revenue from the sale of our products that are not under long-term contracts upon delivery. For commercial aircraft,
delivery is upon completion of manufacturing, customer acceptance, and the transfer of the risk and rewards of ownership.
When a sale arrangement involves multiple elements, such as sales of products that include customization and other services, we evaluate the
arrangement to determine whether there are separate items that are required to be delivered under the arrangement that qualify as separate units of
accounting. The total fee from the arrangement is then allocated to each unit of accounting based on its relative fair value, taking into
consideration any performance, cancellation, termination or refund-type provisions. Fair value generally is established for each unit of accounting
using the sales price charged when the same or similar items are sold separately. We recognize revenue when the recognition criteria for each unit
of accounting are met.
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