Lockheed Martin 2002 Annual Report Download - page 48

FIFTY-FIVE
Lockheed Martin Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1—SIGNIFICANT ACCOUNTING POLICIES
Organization—Lockheed Martin Corporation (Lockheed
Martin or the Corporation) is engaged in the conception,
research, design, development, manufacture, integration and
operation of advanced technology systems, products and serv-
ices. As a lead systems integrator, its products and services
range from aircraft, spacecraft and launch vehicles to missiles,
electronics and information systems. The Corporation serves
customers in both domestic and international defense and
commercial markets, with its principal customers being agen-
cies of the U.S. Government.
Basis of consolidation and classifications—The consolidated
financial statements include the accounts of wholly-owned
subsidiaries and majority-owned entities which the Corporation
controls. Intercompany balances and transactions have been
eliminated in consolidation. Receivables and inventories are
primarily attributable to long-term contracts or programs in
progress for which the related operating cycles are longer than
1 year. In accordance with industry practice, these items are
included in current assets.
Certain amounts for prior years have been reclassified to
conform with the 2002 presentation.
Use of estimates—The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions, including estimates of anticipated
contract costs and revenues utilized in the earnings recognition
process, that affect the reported amounts in the financial state-
ments and accompanying notes. Due to the size and nature of
many of the Corporation’s programs, the estimation of total
revenues and cost at completion is subject to a wide range of
variables, including assumptions for schedule and technical
issues. Actual results could differ from those estimates.
Cash and cash equivalents—Cash equivalents are generally
composed of highly liquid instruments with maturities of 3
months or less when purchased. Due to the short maturity of
these instruments, carrying value on the Corporation’s consol-
idated balance sheet approximates fair value.
Receivables—Receivables consist of amounts billed and cur-
rently due from customers, and include unbilled costs and
accrued profits primarily related to revenues on long-term con-
tracts that have been recognized for accounting purposes but
not yet billed to customers. As such revenues are recognized,
appropriate amounts of customer advances, performance-
based payments and progress payments are reflected as an off-
set to the related accounts receivable balance.
Inventories—Inventories are stated at the lower of cost or esti-
mated net realizable value. Costs on long-term contracts and
programs in progress represent recoverable costs incurred for
production, allocable operating overhead, advances to suppli-
ers and, where appropriate, research and development and
general and administrative expenses. Pursuant to contract pro-
visions, agencies of the U.S. Government and certain other
customers have title to, or a security interest in, inventories
related to such contracts as a result of advances, performance-
based payments and progress payments. Such advances and
payments are reflected as an offset against the related inven-
tory balances. General and administrative expenses related to
commercial products and services provided essentially under
commercial terms and conditions are expensed as incurred.
Costs of other product and supply inventories are principally
determined by the first-in, first-out or average cost methods.
Property, plant and equipment—Property, plant and equipment
are carried principally at cost. Depreciation is provided on
plant and equipment generally using accelerated methods dur-
ing the first half of the estimated useful lives of the assets;
thereafter, straight-line depreciation is used. Estimated useful
lives generally range from 10 to 40 years for buildings and 5
to 15 years for machinery and equipment.
Investments in equity securities—Investments in equity securi-
ties include the Corporation’s ownership interests in affiliated
companies accounted for under the equity method of account-
ing. Under this method of accounting, which generally applies
to investments that represent a 20% to 50% ownership of the
equity securities of the investees, the Corporation’s share of
the earnings or losses of the affiliated companies is included in
other income and expenses. The Corporation recognizes cur-
rently gains or losses arising from issuances of stock by
wholly-owned or majority-owned subsidiaries, or by equity
method investees. These gains or losses are also included in
other income and expenses. Investments in equity securities
also include the Corporation’s ownership interests in compa-
nies in which its investment represents less than 20%. If clas-
sified as available for sale, these investments are accounted for