Document vEjOwMR58y0geejNobzOQ82R

COOPER INDUSTRIES LTD(Form 424B2, Received 10/25/2002 13 39 31) Page 36 of 68 COOPER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the accounts of Cooper and its majority- owned subsidiaries. Affiliated companies are accounted for on the equity method where Cooper owns 20% to 50% of the affiliate unless significant economic, political or contractual considerations indicate that the cost method is appropriate USE OF ESTIMATES The preparation of financial statements in conformity with 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period Actual results could differ from those estimates CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, Cooper considers all investments purchased with original maturities of three months or less to be cash equivalents INVENTORIES Inventories are carried at cost or, if lower, net realizable value On the basis of current costs, 61% and 64% of inventories at December 31, 2001 and 2000, respectively were carried on the last-in, first-out (LIFO) method The remaining inventories are earned on the first-in, first-out (FIFO) method PROPERTY, PLANT AND EQUIPMENT- Property, plant and equipment are stated at cost Depreciation is provided over the estimated useful lives of the related assets using pnmanly the straightline method This method is applied to group asset accounts, which m general have the following livesbuildings -- 10 to 40 years, machinery and equipment -- 3 to 18 years, and tooling, dies, patterns and other -- 3 to 10 years GOODWILL With minor exceptions, goodwill is amortized over 40 years from the respective acquisition dates. At each balance sheet date presented, management reviews the carrying value of longlived assets and goodwill at the lowest level feasible whenever events or changes in circumstances indicate that the carrying amount may not be recoverable If this review indicates that the carrying amount will not be recoverable, as determined based on undiscounted cash flows over the remaining amortization periods, an impairment loss is recognized The impairment loss equals the excess of the carrying amount over the fair value of the asset The fair value of the asset is based on prices for similar assets, if available, or discounted cash flows REVENUE RECOGNITION Cooper recognizes revenues m accordance with invoice terms, typically when products are shipped Accruals for sales returns and other allowances are provided at the time of shipment based upon expenence Shipping and handling costs of $125 5 million, $124 6 million and $96 2 million m 2001, 2000 and 1999, respectively are reported as a reduction of revenues in the consolidated income statements RESEARCH AND DEVELOPMENT EXPENDITURES Research and development expenditures are charged to earnings as incurred Research and development expenses were $55 8 million, $57 7 million and $54 0 million m 2001, 2000 and 1999, respectively /_________rr*j..____r\.i /-_ .ttx nrt-' n /~rrrr i i 4i r\r\r\ A t A r\ //% AAA