Raytheon 2012 Annual Report Download - page 95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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Inventories—Inventories are stated at cost (first-in, first-out or average cost), but not in excess of net realizable value. An
impairment for excess or inactive inventory is recorded based upon an analysis that considers current inventory levels, historical
usage patterns, future sales expectations and salvage value.
Inventories consisted of the following at December 31:
(In millions) 2012 2011
Materials and purchased parts $ 74 $ 60
Work in process 291 264
Finished goods 16 12
Total $ 381 $ 336
We capitalize costs incurred in advance of contract award or funding in inventories if we determine that contract award or
funding is probable. To the extent these are precontract costs, start-up costs have been excluded. We included capitalized
precontract costs and other deferred costs of $100 million and $121 million in inventories as work in process at December 31,
2012 and December 31, 2011, respectively.
Property, Plant and Equipment, Net—Property, plant and equipment, net are stated at cost less accumulated depreciation.
Major improvements are capitalized while expenditures for maintenance, repairs and minor improvements are expensed. We
include gains and losses on the sales of plant and equipment that are allocable to our contracts in overhead as we generally
can recover these costs through the pricing of products and services to the U.S. Government. For all other sales or asset
retirements, the assets and related accumulated depreciation and amortization are eliminated from the accounts, and any
resulting gain or loss is reflected in income.
Provisions for depreciation generally are computed using a combination of accelerated and straight-line methods and are
based on estimated useful lives as follows:
Years
Machinery and equipment 3–10
Equipment leased to others 5–10
Buildings 20–45
Leasehold improvements are amortized over the lesser of the remaining life of the lease or the estimated useful life of the
improvement.
Impairment of Goodwill and Long-lived Assets—We evaluate our goodwill for impairment annually or whenever events
or circumstances indicate that the carrying value of goodwill may not be recoverable. We perform our annual impairment test
as of the first day of the fourth quarter utilizing a two-step methodology that requires us to first identify potential goodwill
impairment and then measure the amount of the related goodwill impairment loss, if any. We have identified our operating
segments as reporting units under the impairment test assessment criteria outlined in GAAP. In performing our annual
impairment test in the fourth quarter of 2012 and 2011, we did not identify any goodwill impairment.
We determine whether long-lived assets are to be held for use or disposal. Upon indication of possible impairment of long-
lived assets held for use, we evaluate the recoverability of such assets by measuring the carrying amount of the assets against
the related estimated undiscounted future cash flows. When an evaluation indicates that the future undiscounted cash flows
are not sufficient to recover the carrying value of the asset, the asset is adjusted to its estimated fair value. In order for long-
lived assets to be considered held for disposal, we must have committed to a plan to dispose of the assets. Once deemed held
for disposal, the assets are stated at the lower of the carrying amount or fair value.
Computer Software, Net—Internal use computer software, net, included in other assets, net, which consists primarily of our
enterprise-wide software solutions, is stated at cost less accumulated amortization and is amortized using the straight-line
method over its estimated useful life, generally 10 years.