Canon 2007 Annual Report Download - page 47

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Cash flow management
Canon also places significant emphasis on cash flow
management. The following are the KPIs relating to cash flow
management that management believes to be important.
Inventory turnover within days is a KPI because it is a
measure of supply-chain management efficiency. Inventories
have inherent risks of becoming obsolete, deteriorating or
otherwise decreasing in value significantly, which may adversely
affect Canon’s operating results. To mitigate these risks,
management believes that it is important to continue reducing
inventories and shortening 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.
Management also seeks debt-free operations. For a manufac-
turing 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.
Stockholders’ equity to total assets ratio (ratio of total
stockholders’ equity to total assets) is another KPI for Canon.
Canon believes that stockholders’ equity to total asset ratio
measures its long-term viability. Canon believes that a high or
increasing stockholders’ equity ratio usually indicates that
Canon has a good, or improving ability to fund debt obligations
and other unexpected expenses, which means in the long-term
that Canon is better able to maintain a high level of stable
investments for its future operations and development. As
Canon puts a strong emphasis on its research and development
activities, management believes that it is important to maintain
a stable financial base and, accordingly, a high level of
stockholders’ equity to total assets ratio.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements are prepared in accor-
dance with U.S. generally accepted accounting principles 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 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 generates revenue principally through the sale of
consumer products, equipment, supplies, and related services
under separate contractual arrangements. Canon recognizes
revenue when persuasive evidence of an arrangement exists,
delivery has occurred and title and risk of loss have been trans-
ferred to the customer or services have been rendered, the sales
price is fixed or determinable, and collectibility is probable.
Revenue from sales of consumer products including
office imaging products, computer peripherals, business infor-
mation products and cameras is recognized upon shipment or
delivery, depending upon when title and risk of loss transfer to
the customer.
Revenue from sales of optical equipment, such as steppers
and aligners that are sold with customer acceptance provisions
related to their functionality, is recognized when the equipment
is installed at the customer site and the specific criteria of the
equipment functionality are successfully tested and demon-
strated by Canon. Service revenue is derived primarily from
separately priced product maintenance contracts on equipment
sold to customers and is measured at the stated amount of the
contract and recognized as services are provided.
Canon also offers separately priced product maintenance
contracts for most office imaging products, for which the
customer typically pays a stated base service fee plus a variable
amount based on usage. Revenue from these service mainte-
nance contracts is measured at the stated amount of the
contract and recognized as services are provided and variable
amounts are earned.
Revenue from the sale of equipment under sales-type
leases is recognized at the inception of the lease. Income on
sales-type leases and direct-financing leases is recognized over
the life of each respective lease using the interest method.
Leases not qualifying as sales-type leases or direct-financing
leases are accounted for as operating leases and related revenue
is recognized ratably over the lease term. When equipment
KEY PERFORMANCE INDICATORS
2007 2006 2005 2004 2003
Net sales (Millions of yen) ¥4,481,346 ¥4,156,759 ¥3,754,191 ¥3,467,853 ¥3,198,072
Gross profit to net sales ratio 50.1% 49.6% 48.5% 49.4% 50.3%
R&D expense to net sales ratio 8.2% 7.4% 7.6% 7.9% 8.1%
Operating profit to net sales ratio 16.9% 17.0% 15.5% 15.7% 14.2%
Inventory turnover within days 44 days 45 days 47 days 49 days 49 days
Debt to total assets ratio 0.6% 0.7% 0.8% 1.1% 3.1%
Stockholders' equity to total assets ratio 64.8% 66.0% 64.4% 61.6% 58.6%
Note: Inventory turnover within days; Inventory divided by net sales for the previous six months, multiplied by 182.5.