Notes to Condensed Consolidated Financial Statements Basis of Presentation Hewlett-Packard Company and Subsidiaries Hewlett-Packard Company (HP or hp) is a leading global provider of computing and imaging solutions and services for business and home, and is focused on capitalizing on the opportunities of the Internet and the emergence of next-generation appliances, e-services and infrastructure. These condensed consolidated financial statements do not constitute a full set of financial statements prepared  in accordance with accounting principles generally accepted in the United States. The condensed consolidated  financial statements should be read in conjunction with the complete 2000 Consolidated Financial Statements and Notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations includ- ed in hp’s Annual Report on Form 10-K for fiscal year 2000 accompanying the Notice of Annual Meeting and Proxy Statement for hp’s 2001 Annual Meeting of Shareowners. Summary of Significant Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of hp and its wholly-owned and controlled majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in hp’s financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition. Revenue from product sales is generally recognized at the time the product is shipped, with pro- visions established for price protection programs and for estimated product returns. Upon shipment, hp also provides for the estimated cost that may be incurred for product warranties and post-sales support. Coupons, rebates and other cash sales incentives offered by hp to its customers are recorded as a reduction of revenue at the time of sale. Service revenue is recognized over the contractual period or as services are rendered and accepted by the customer.  Advertising. Advertising costs are expensed as incurred. Taxes on Earnings. Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized principally for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Net Earnings Per Share. HP’s basic earnings per share (EPS) is calculated based on net earnings and the weighted- average number of shares outstanding during the reporting period. Diluted EPS includes additional dilution from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options outstanding and the conversion of debt. All share and per-share amounts reflect the retroactive effects of all stock splits, including the  two-for-one stock split in the form of a stock dividend effective October 27, 2000. Cash Equivalents and Short-Term Investments. HP classifies investments as cash equivalents if the original maturi- ty of an investment is three months or less from the purchase date. Short-term investments principally consist of time deposits and money-market instruments. Cash equivalents and short-term investments are stated at cost, which approximates market value. Inventory. Inventory is valued at standard cost which approximates actual cost computed on a first-in, first-out basis, not in excess of market value. 50