Southwest Airlines 1994 Annual Report Download - page 27

Notes to Consolidated Financial Statements
Southwest Airlines – 1994 Annual Report Page 27
Notes to Consolidated Financial Statements
1. Summary Of Significant Accounting Policies
BASIS OF PRESENTATION The consolidated financial statements include the accounts of Southwest
Airlines Co. (Southwest) and its wholly owned subsidiaries (the Company). All significant intercompany
balances and transactions have been eliminated. Certain prior year amounts have been reclassified for
comparison purposes.
CASH AND CASH EQUIVALENTS Cash equivalents consist of investment grade commercial paper issued by
major financial institutions that are highly liquid and have original maturity dates of three months or less.
Cash and cash equivalents are carried at cost, which approximates market value.
INVENTORIES Inventories of flight equipment expendable parts, materials, and supplies are carried at
average cost. These items are charged to expense when issued for use.
PROPERTY AND EQUIPMENT Depreciation is provided by the straight-line method to residual values over
periods ranging from 15 to 20 years for flight equipment (see Note 3) and 3 to 30 years for ground
property and equipment. Property under capital leases and related obligations are recorded at an amount
equal to the present value of future minimum lease payments computed on the basis of the lessee's
incremental borrowing rate or, when known, the interest rate implicit in the lease. Amortization of
property under capital leases is on a straight-line basis over the lease term and is included in depreciation
expense.
AIRCRAFT AND ENGINE MAINTENANCE The cost of engine overhauls and routine maintenance costs for
aircraft and engine maintenance are charged to maintenance expense as incurred. Scheduled airframe
overhaul costs are capitalized at amounts not to exceed the fair market value of the related aircraft and
amortized over the estimated periods benefited, presently 8 years. Modifications that significantly enhance
the operating performance or extend the useful lives of aircraft or engines are capitalized and amortized
over the remaining life of the asset.
REVENUE RECOGNITION Passenger revenue is recognized when the transportation is provided. Tickets
sold but not yet used are included in “ Air traffic liability.”
FREQUENT FLYER AWARDS The Company accrues the estimated incremental cost of providing free travel
awards earned under its Company Club Frequent Flyer program.
ADVERTISING The Company expenses the production costs of advertising as incurred. Advertising
expense for the years ended December 31, 1994, 1993, and 1992 was $79,475,000, $55,344,000, and
$42,068,000, respectively.
2. Acquisition
On December 31, 1993, Southwest exchanged 3,574,656 newly issued shares of its common stock for all
of the outstanding stock of Morris Air Corporation (Morris), a low-fare commercial/charter air carrier
based in Salt Lake City. The acquisition was accounted for as a pooling of interests and, accordingly, the
Company's consolidated financial statements were restated to include the accounts and operations of
Morris for all periods prior to the acquisition.