Toro 2007 Annual Report Download - page 56

44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
AND RELATED DATA
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the
accounts of the company and its majority-owned subsidiaries. The
company uses the equity method to account for investments over
which it has the ability to exercise significant influence over operat-
ing and financial policies. Consolidated net earnings include the
company’s share of the net earnings (losses) of these companies.
The cost method is used to account for investments in companies
that the company does not control and for which it does not have
the ability to exercise significant influence over operating and
financial policies. In accordance with the cost method, these
investments are recorded at cost or fair value, as appropriate. All
material intercompany accounts and transactions have been
eliminated from the consolidated financial statements.
Accounting Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and
liabilities as of the date of the financial statements, and the re-
ported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain amounts from prior years’ financial statements have been
reclassified to conform to the current year presentation. The
reclassifications had no impact on results of operations as previ-
ously reported.
Cash and Cash Equivalents
The company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Receivables
The company grants credit to customers in the normal course of
business. Management performs on-going credit evaluations of
customers and maintains allowances for potential credit losses.
Receivables are recorded at original carrying value less reserves
for estimated uncollectible accounts.
Inventories
Inventories are valued at the lower of cost or net realizable value
with cost determined by the last-in, first-out (LIFO) method for
most inventories. The first-in, first-out (FIFO) method is used for
other inventories, constituting approximately 35 percent of total
inventories as of October 31, 2007 and 2006. The company
establishes a reserve for excess, slow-moving, and obsolete
inventory that is based on the difference between the cost and
estimated net realizable value for that inventory. These reserves
are based on a review and comparison of current inventory levels
to the planned production as well as planned and historical sales
of the inventory.
During fiscal 2006, LIFO inventory layers were reduced. This
reduction resulted in charging lower inventory costs prevailing in
previous years to cost of sales, thus reducing cost of sales by
$713 below the amount that would have resulted from replacing
the liquidated inventory at end of year prices. During fiscal 2007,
LIFO inventory layers were also reduced, which resulted in an
immaterial impact to cost of sales.
Inventories as of October 31 were as follows:
2007 2006
Raw materials and work in progress $ 68,367 $ 67,976
Finished goods and service parts 242,965 229,137
311,332 297,113
Less: LIFO reserve 42,889 40,860
Reserves for excess and obsolete inventory 17,168 17,709
Total $ 251,275 $ 238,544
Property and Depreciation
Property, plant, and equipment are carried at cost. The company
provides for depreciation of plant and equipment utilizing the
straight-line method over the estimated useful lives of the assets.
Buildings, including leasehold improvements, are generally depre-
ciated over 10 to 45 years, and equipment over 3 to 7 years.
Tooling costs are generally depreciated over 3 to 5 years using the
straight-line method. Software and web site development costs are
generally amortized over 2 to 5 years utilizing the straight-line
method. Expenditures for major renewals and improvements,
which substantially increase the useful lives of existing assets, are
capitalized, and maintenance and repairs are charged to operating
expenses as incurred. Interest is capitalized during the construc-
tion period for significant capital projects. During the fiscal years
ended October 31, 2007, 2006, and 2005, the company capitalized
$820, $760, and $408 of interest, respectively.