36 Eme r s on 2013 Ann u al R e por t emerson electric co subsidiaries Y e a r s e n d e d S e p t e m b e r 3 0 Dollars i n m i l l i o ns e x ce p t p e r s h a r e amounts or where noted 1 s ummary of s ignificant a ccounting Policies Financial s tatement Presentation The preparation of the fnancial statements in conformity with US generally accepted accounting principles US GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures Actual results could differ from these estimates Certain prior year amounts have been reclassifed to conform with current year presentation See Note 3 for operating results that have been classifed as discontinued operations in 2011 Effective October 1 2012 the Company adopted updates to ASC 220 Comprehensive Income and now presents comprehensive income in a separate fnancial statement immediately following the statement of earnings This update does not change the items reported in other comprehensive income or when those items should be reclassifed into earnings Effective frst quarter 2014 additional disclosures will be required for comprehensive income including presenting reclassifcations out of accumulated other comprehensive income by income statement line item Princi P les o F c onsolidation The consolidated fnancial statements include the accounts of the Company and its controlled affliates Intercompany transactions profts and balances are eliminated in consolidation Investments of 20 percent to 50 percent of the voting shares of other entities are accounted for by the equity method Investments in publiclytraded companies of less than 20 percent are carried at fair value with changes in fair value refected in accumulated other comprehensive income Investments in nonpubliclytraded companies of less than 20 percent are carried at cost Foreign c urrency t ranslation The functional currency for most of the Companys nonUS subsidiaries is the local currency Adjustments resulting from translating local currency fnancial statements into US dollars are refected in accumulated other comprehensive income c ash e quivalents Cash equivalents consist of highly liquid investments with original maturities of three months or less i nventories Inventories are stated at the lower of cost or market The majority of inventory is valued based on standard costs that approximate average costs while the remainder is principally valued on a frstin frstout basis Cost standards are revised at the beginning of each fscal year The annual effect of resetting standards plus any operating variances incurred during each period are allocated between inventories and cost of sales Following are the components of inventory as of September 30 2012 2013 Finished products 747 678 Raw materials and work in process 1378 1217 Total inventories 2125 1895 Fair v alue m easurement ASC 820 Fair Value Measurement establishes a formal hierarchy and framework for measuring certain fnancial statement items at fair value and requires disclosures about fair value measurements and the reliability of valuation inputs Under ASC 820 measurement assumes the transaction to sell an asset or transfer a liability occurs in the principal or at least the most advantageous market for that asset or liability Within the hierarchy Level 1 instruments use observable market prices for the identical item in active markets and have the most reliable valuations Level 2 instruments are valued through brokerdealer quotation or other approaches using marketobservable inputs for similar items in active markets including forward and spot prices interest rates and volatilities Level 3 instruments are valued using inputs not observable in an active market such as companydeveloped future cash fow estimates and are considered the least reliable Valuations for all of Emersons fnancial instruments fall within Level 2 The fair value of the Companys longterm debt is Level 2 estimated using current interest rates and pricing from fnancial institutions and other market sources for debt with similar maturities and characteristics n o te s t o c o n s o li d a ted F i n ancial s t a temen ts