Textron Inc - Financial Statement, Accounting Method, Operating Cycle - Example

Textron Inc Textron being multi-industry company has been engaged in a number of business operations that include limited aircraft, industrial, defence and finance. The company at its current state is enjoying unlimited operations in the global arena. This claim can be justified by the fact that Textron products are sold across the globe. The company carries out its business through five strong segments, namely: Cessna, Bell, Textron systems, Industrial and Finance. The first four segments represent the manufacturing businesses while the fifth segment represents the corporate finance business. The company’s aviation products have helped the company develop a strong brand in both local and international market. Textron manufactures and markets Bell Helicopter and Cessna aircraft. Introduction Textron Inc. is a multi-industry company that operates an array defence, aircraft, industrial and finance businesses. This company has no limited market space owing to the fact that its global presence is felt globally through its renowned innovative products and services. It is noteworthy that Textron was founded in 1923 and reincorporated in Delaware on July 31, 1967. The company carries out its business through five strong segments, namely: Cessna, Bell, Textron systems, Industrial and Finance. The first four segments represent the manufacturing businesses while the fifth segment represents the corporate finance business. Textron Inc will be considered an aeronautically relevant company owing to the fact that it is a major player in the aviation industry engaging in the manufacturing and marketing of Bell Helicopter and Cessna aircraft. Cessna is operated based on unit sales with two primary lines of business, namely Aircraft sale and Aftermarket services. Aircraft sales include Caravan single-engine utility turboprops, Citation jets, single engine piston aircraft and lift solutions by Citation Air while Aftermarket services include but not limited to maintenance, parts, inspection and repair services. Bell Helicopters is one the best selling unit for military and commercial helicopters, tilt rotor aircraft as well as respective spare parts and services globally. Revenue from Bell accounted for approximately 31%, 31% and 27% of the total revenue of the company earned in 2011, 2010 and 2009, respectively while in the same periods Cessna recorded revenue approximated at 26%, 24% and 32%, respectively. Presentation of Textron financial statement All the four financial statements are presented in the financial report. There is no doubt that all the financial statements have been presented the same way the book is. This claim justifies the fact that the financial statements have been presented vertically. For instance, in the statement of financial position the assets have been presented at the top then followed with the liabilities. The same case applies with the income statement whereby all the transaction figures have been presented vertically. Textron accounting method Textron has employed the accrual method of accounting. This claim can be justified by the fact that the company only recognizes its revenue when sales of a product, which are not under long-term contract, are made upon delivery. For commercial aircraft, delivery is upon completion of manufacturing. Taxes gathered from clients and submitted to the government authorities are recorded on a net basis. However, in case the company engages in a sales arrangement that is involving several deliverables such as sale of products that consist of customization services, the company will have to evaluate the arrangement to determine presence of items that should be delivered under the agreement and qualify as separate units of accounting. Revenue under long-term contracts is accounted for under the percentage-of-completion method of accounting. As earlier mentioned it is only products that are not under long-term contracts that are accounted for under accrual method. Under the percentage-of-completion method, profit is estimated as the difference between the total estimated revenues and cost of a contract. Textron Inc operating cycle A corporate operating cycle refers to the duration with which a company buys inventory, sells and collects revenue from the accounts receivables. Operating cycle is not standard for all the companies owing to the difference in industry and as such, the cycle will be different for companies in different industries. A number of steps are applied in calculating the operating cycle of a company. To establish the operating cycle of Textron, an individual will have to calculate three important figures that include the days inventories outstanding, the days sales outstanding and finally the days payables outstanding. The days inventories outstanding = 94 days The days sales outstanding = 28 days The days payables outstanding = 33 days In order to determine the corporate operating cycle one will have to add the days inventories outstanding and days sales outstanding then subtract the days payables outstanding. This means that Textron Inc operating cycle will be equivalent to 92 + 28 - 33 = 87. In other words, Textron Inc will take 87 days to buy inventories, covert it into sales and then collect revenue from account receivables. extron Inventories Textron inventories are composed of the following: finished goods, work in progress plus raw materials and components amounting to $ 1,012, $ 2,202 and $ 399 respectively for the financial year ended 2011. It is noteworthy that the inventories are stated at the lower of cost or estimated net realizable value. Textron Inc values its inventory based on the First In First out (FIFO) method or the Last in First out (LIFO) method especially for particular inventories whereby LIFO provides a better matching of costs and revenues. Inventories relating to the longer contracts are represented at the actual production costs, including allocable operating overhead, advances to suppliers. In case the company engages into contracts with the U.S government, the allocable research and development and the general and administrative expenses will be included in the production cost when valuing the inventory. Owing to the fact that the company tends to engage in long production cycles and portion of the costs cannot be realised in a period of a single year, the US government agencies will be awarded a title to security interest in inventories related to such long term contracts due to advances, performance-based payments and progress payments. The payments and advances made by the US government agencies are always reflected as an offset against the related inventory balances. In case the rights of offset exists the customer deposits will be recorded against the inventory. The inventories valued using the LIFO method amounted to $1.0 billion and $1.3 billion during the financial years 2011 and 2010 respectively. Textron Assets It is no doubt that Textron boasts of massive asset base, which can be categorised into two main categories of fixed and current assets. Key among the assets of Textron include plants, properties, land, goodwill, equipment, automobiles, cash and equivalents, the Inventory informs us of raw material, work in progress, and receivables. As on December 31, 2011 Textron was operating approximately 59 plants throughout the United States and 48 plants outside the United States. The company only owns 55 plants while the manufacturing space approximated at 20.7 million square feet is operated under a lease agreement. Textron also owns and leases office space, warehouses, and other space in different locations. Textron owned property, plant and equipment are recorded at cost and depreciation is charged on such assets through straight-line method. Form the consolidated cash flow figures the company recorded the following figures ($) 1,068, 843 and (1,951) for operating activities, financing activities and financing activities respectively. The cash and cash equivalents are composed of cash and short term liquid investments with original maturities estimated at three months or less. Textron has a policy of classifying finance receivables as held for investment in case there is intent and the ability to hold the receivables for the near future or until maturity or payoff. The finance receivables take into consideration monies provided by the finance group to customers in order to aid purchase of Textron products. Finance receivables have been classified into different product line with respect to its use and the categories include Aviation, Golf Equipment, Golf Mortgage, Timeshare, and Structured capital. With respect to goodwill, the company normally evaluates the recoverability of this intangible asset yearly in the fourth quart or more regularly in case there are negative changes in situations such as reduction in sales, earnings, cash flows or material in the business environment, it demonstrates that the carrying value of a reporting unit might be impaired. The Accounts Receivable of Textron Inc consist of Commercial and U.S government contracts approximate at ($) 528 and 346 respectively for the financial year ended 2011. Ethical issues The company is only concerned about the environmental liability related to its activities. The company has clearly stated that liabilities for environmental matters are recorded on a site-by-cite basis. In other words, the company is highly concerned about the environment, which is a sign of good company ethics towards environmental conservation. Read More