Southwest Airlines 1996 Annual Report Download - page 35

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35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic
airline that provides shorthaul, high frequency, point-to-point, low-fare service. The consolidated
financial statements include the accounts of Southwest and its wholly owned subsidiaries (the
Company). All significant intercompany balances and transactions have been eliminated. 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 the
financial statements and accompanying notes. Actual results could differ from these estimates.
Certain prior year amounts have been reclassified for comparison purposes.
CASH AND CASH EQUIVALENTS Cash equivalents consist of certificates of deposit
and investment grade commercial paper issued by major corporations and 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 12 to 20 years for flight equipment 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 Company’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. In accordance with Statement of Financial
Accounting Standards No. 121, “ Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,” the Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows to be generated by those assets are less than the
carrying amounts of those assets.