Canon 2003 Annual Report Download - page 29

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inherent risks of becoming obsolete, deteriorating or otherwise
decreasing in value, which may adversely affect Canon’s
operating results. To mitigate these risks, management believes
that it is important to continue reducing inventories and shorten
production lead times in order to achieve early recovery of related
product expenses, by strengthening supply-chain management.
Canon’s management seeks to meet its liquidity and capital
requirements primarily with cash flow from operations and also
seeks debt-free operations. For a manufacturing company such
as Canon, the process for realizing profit on any endeavor can be
lengthy, involving as it does R&D, manufacturing, and sales
activities. Management, therefore, believes that it is important to
have sufficient financial strength so that it does not have to rely
on external funding. Canon has continued to reduce its reliance
on external funding for capital investments in favor of generating
the necessary funds from its own operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States of America, and based on the selection and
application of significant accounting policies, which require
management to make significant estimates and assumptions.
Canon believes that the following are some of the more critical
judgment areas in the application of its accounting policies that
currently affect its financial condition and results of operations.
Revenue recognition
Canon recognizes revenue for sales of products when persuasive
evidence of an arrangement including title transfer exists, delivery
has occurred, the sales price is fixed or determinable, and
collectibility is probable. These criteria are met for mass-
merchandising products such as printers and cameras at the
time when the product is received by the customer based on the
free-on-board destination sales terms, and for equipment with
acceptance provisions such as steppers and aligners at the time
when the equipment is received by the customer and the specific
criteria of the equipment functionality is successfully tested and
demonstrated by Canon to the customer. Service revenues are
derived primarily from maintenance contracts on our equipment
sold to customers and are recognized over the term of the
contracts. A substantial portion of office imaging products is sold
with service maintenance guarantee contracts for which the
customer typically pays a base service fee plus a variable amount
based on usage.
Allowance for doubtful accounts
Allowance for doubtful accounts is determined using a combination
of factors to ensure that Canon’s trade and financing receivables
are not overstated due to uncollectibility. Canon maintains a bad
debt reserve for all customers based on a variety of factors,
including the length of time receivables are past due, trends in
overall weighted average risk rating of the total portfolio,
macroeconomic conditions, significant one-time events and
historical experience. Also, Canon records specific reserves for
individual accounts when Canon becomes aware of a customer’s
inability to meet its financial obligations to Canon, such as in the
case of bankruptcy filings or deterioration in the customer’s
operating results or financial position. If circumstances related to
customers change, estimates of the recoverability of receivables
would be further adjusted.
Valuation of inventories
Inventories are stated at the lower of cost or market value. Cost is
determined principally by the average method for domestic
inventories and the first-in, first-out method for overseas inventories.
Market value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated
costs necessary to make a sale. Canon routinely reviews its
inventories for their salability and for indications of obsolescence to
determine if inventories should be written-down to market value.
Judgments and estimates must be made and used in connection
with establishing such allowances in any accounting period. In
estimating the market value of its inventories, Canon considers the
age of the inventories and the likelihood of spoilage or changes in
market demand for its
inventories.
KEY PERFORMANCE INDICATOR 2003 2002 2001 2000
Net sales (Millions of yen) ¥3,198,072 ¥2,940,128 ¥ 2,907,573 ¥ 2,696,420
Gross profit to net sales ratio 50.3% 47.6% 44.0% 41.5%
R&D expense to net sales ratio 8.1% 7.9% 7.5% 7.2%
Operating profit to net sales ratio 14.2% 11.8% 9.7% 8.7%
Inventory turnover within days 49 days 51 days 57 days 65 days
Debt to total assets ratio 3.1% 5.0% 10.4% 13.8%
Note: Inventory turnover within days; Inventory divided by net sales for the previous six months, multiplied by 182.5.