Canon 2008 Annual Report Download - page 47

45
Cash fl ow managemen
t
Canon also places signifi cant emphasis on cash fl ow management.
The following are the KPIs with regard to cash fl ow management
that Canon’s mana
g
ement believes to be important
.
Inventor
y
turnover wit
h
in
d
a
y
s is a KPI
b
ecause it measures t
h
e
adequacy of supply chain management. Inventories have inherent
risks of becoming obsolete, physically ruined or otherwise decreas
-
ing signi
fi
cantly in value, which may adversely a
ff
ect Canon’s
operatin
g
results. To miti
g
ate these risks, mana
g
ement believes
t
h
at it is crucia
l
to continue re
d
ucin
g
inventories an
d
d
ecrease
pro
d
uction
l
ea
d
times in or
d
er to prompt
l
y co
ll
ect re
l
ate
d
pro
d
uct
expenses by strengthening supply chain management
.
Canon’s mana
g
ement seeks to meet its liquidit
y
and capital
requirements primaril
y
with cash
fl
ow
f
rom operations.
Management also seeks debt-free operations. For a manufac
-
turing company like Canon, it generally takes considerable time
to realize pro
fi
t
f
rom a business as the process o
f
R&D, manu
-
f
acturin
g
and sales has to be
f
ollowed
f
or success. There
f
ore,
mana
g
ement believes that it is important to have suffi cient
fi nancial strength so that the Company does not have to rely on
external funds. Canon has continued to reduce its dependency
on external
f
unds
f
or capital investments in
f
avor o
f
g
eneratin
g
the necessar
y
f
unds
f
rom 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 assets ratio
measures its lon
g
-term sustainabilit
y
. Canon also believes that
ac
h
ievin
g
a
h
i
gh
or risin
g
stoc
kh
o
ld
ers’ equit
y
ratio in
d
icates
that Canon has maintained a good status or further improved
the constitution to fund debt obligations and other unexpected
expenses. In the lon
g
-term, Canon will be able to maintain a
hi
g
h level o
f
stable investments
f
or its
f
uture operations and
d
eve
l
opment. As Canon puts strong emp
h
asis on its researc
h
and development activities, management believes that it is
important to maintain a stable
fi
nancial base and, accordingly,
a hi
g
h level o
f
stockholders’ equit
y
to total assets ratio.
KEY PERF
O
RMAN
C
E INDI
C
AT
O
R
S
2008
2
00
7
2
006
2
00
5
2004
Net sales (Millions o
f
yen) ¥4,094,161 ¥4
,
481
,
34
6
¥4
,
156
,
759 ¥3
,
754
,
19
1
¥3
,
467
,
853
Gross profi t to net sales rati
o
47.3% 50.1
%
49.6
%
48.5
%
4
9.4
%
R
&D ex
p
ense to net sales rati
o
9.1% 8.2
%
7
.4
%
7.6
%
7.9
%
O
perating pro
fi
t to net sales ratio 12.1% 16.9
%
17.0
%
15.5
%
1
5.7
%
Inventor
y
turnover wit
h
in
d
a
ys
47 days
4
4
d
a
y
s
4
5
d
a
y
s
4
7
d
a
y
s
4
9
d
a
ys
D
ebt
to
tota
l
assets
r
at
i
o
0.4% 0.6
%
0.7
%
0
.8
%
1.1
%
Stoc
kh
o
ld
ers’ equity to tota
l
assets rati
o
67.0%
6
4.8
%
6
6.0
%
64.4
%
61.6
%
N
ote: Inventory turnover within days; Inventory divided by net sales for the previous six months, multiplied by 182.5
.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated fi nancial statements are
p
re
p
ared in accor-
dance with U.S. generally accepted accounting principles and
based on the selection and application o
f
si
g
ni
fi
cant accountin
g
policies which require mana
g
ement to make si
g
nifi cant estimates
and assumptions. Canon believes that the following are the
more critical judgment areas in the application of its accounting
policies that currentl
y
a
ff
ect its
fi
nancial condition and results
o
f
operations
.
R
evenue reco
g
nitio
n
Canon generates revenue principally through the sale o
f
con
-
sumer products, equipment, supplies, and related services under
separate contractua
l
arran
g
ements. Canon reco
g
nizes revenue
when persuasive evidence of an arrangement exists, delivery has
occu
rr
ed
a
n
d
t
i
t
l
e
a
n
d
ri
s
k
o
f l
oss
h
a
v
e
bee
n
t
r
a
n
s
f
e
rr
ed
to
t
h
e
customer or services have been rendered, the sales price is
fi
xed
or
d
etermina
bl
e, an
d
co
ll
ecti
b
i
l
it
y
is pro
b
a
bl
e
.
Revenue from sales of consumer products includin
g
offi ce imaging products, computer peripherals, business infor
-
mation products and cameras is recognized upon shipment or
deliver
y
, dependin
g
upon when title and risk o
f
loss trans
f
er to
the
custo
m
e
r
.
Revenue
f
rom sales o
f
optical equipment, such as steppers
an
d
a
l
i
g
ners t
h
at are so
ld
wit
h
customer acceptance provisions
related to their functionality, is recognized when the equipment
is installed at the customer site and the s
p
ecifi c criteria of the
equipment
f
unctionality are success
f
ully tested and demonstrated
b
y
Canon. Service revenue is derived primaril
y
f
rom separatel
y
p
rice
d
p
ro
d
uct maintenance contracts on e
q
ui
p
ment so
ld
to
custo
m
e
r
s
a
n
d
i
s
m
easu
r
ed
at
t
h
e
stated
a
m
ou
n
t
o
f
t
h
e
co
n
t
r
act
and recognized as services are provided
.
Canon also o
ff
ers separatel
y
priced product maintenance
contracts
f
or most o
ffi
ce ima
g
in
g
products,
f
or 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 o
f
the contract
and reco
g
nized as services are provided and variable amounts
a
r
e
ea
rn
ed.
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-
fi
nancin
g
leases is reco
g
nized over the li
f
e o
f
eac
h
respective
l
ease usin
g
t
h
e interest met
h
o
d
. Leases not
qualifying as sales-type leases or direct-fi nancing leases are
accounted for as operating leases and related revenue is recog
-
nized ratably over the lease term. When equipment leases are