NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Donaldson Company, Inc. and Subsidiaries A Summary of Significant  Accounting Policies Description of Business Donaldson Company, Inc., is a lead- ing worldwide manufacturer of filtration systems and replacement parts. The company’s product mix includes air and liquid filters and exhaust and emission control products for mobile equipment; in-plant air cleaning  systems; air intake systems and exhaust products for industrial gas turbines; and specialized filters for such diverse applications as computer disk drives, aircraft  passenger cabins and semi-conductor processing. Products are manufactured at more than three dozen Donaldson plants around the world and through three joint ventures. Principles of Consolidation The consolidated financial state- ments include the accounts of Donaldson Company, Inc. and all majority-owned subsidiaries (the company). All significant inter-company accounts and transactions have been eliminated. The company also has three joint ventures that are not majority-owned, all accounted for on the equity method. Certain amounts in prior periods have been reclassified to conform to the current presentation. The reclassifications had no impact on the company’s net earnings or shareholders’ equity as previously reported. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Foreign Currency Translation For most foreign operations, local currencies are considered the functional currency. Assets and liabilities are translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. Translation gains or losses, net of applicable deferred taxes, are accumulated in the foreign currency adjustment in accumulated other comprehensive income(loss) in shareholders’ equity. There were no signifi- cant foreign currency transaction gains or losses in 2001. Foreign currency transaction losses of $0.2 million in 2000 and gains of $0.2 million in 1999 are included in earnings before income taxes. Impairment of Long-Lived Assets The company reviews the long-lived assets, including identifiable intangibles and asso- ciated goodwill, for impairment when events or changes  in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value as measured by the undiscounted cash flows. Intangible Assets Intangible assets, primarily consisting of goodwill, are amortized on a straight-line basis over periods ranging up to 20 years. Amortization expense was $3.8 million, $2.7 million and $0.7 million at July 31, 2001, 2000 and 1999, respectively. Accumulated amortization was $9.6 million and $5.8 million as of July 31, 2001 and 2000, respectively. Cash Equivalents The company considers all highly liquid temporary investments with a maturity of three months or less when purchased to be cash equivalents. Cash equiva- lents are carried at cost which approximates market value. Inventories Inventories are stated at the lower of cost or mar- ket. Domestic inventories are valued using the last-in, first- out (LIFO) method, while the international subsidiaries use the first-in, first-out (FIFO) method. Inventories valued at LIFO were approximately 53 percent and 52 percent of total inventories at July 31, 2001 and 2000, respectively. The FIFO cost of inventories valued under the LIFO method exceeded the LIFO carrying values by $22.5 million and $21.2 million at July 31, 2001 and 2000, respectively. Property, Plant and Equipment Property, plant and equipment are stated at cost. Additions, improvements or major renewals are capitalized, while expenditures that do not enhance or extend the asset’s useful life are charged to operating expense as incurred. Depreciation is computed principally by use of declining balance methods on facili- ties and equipment acquired on or prior to July 31, 1992. The company adopted the straight-line depreciation method for all property acquired after July 31, 1992. Accelerated depreciation methods are generally used for income tax purposes. The estimated useful lives of property, plant and equip- ment are as follows: Buildings 10 to 40 years Machinery and equipment 3 to 10 years 20