Canon 2009 Annual Report Download - page 47

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Cash fl ow management
Canon also places signifi cant emphasis on cash fl ow manage-
ment. The following are the KPIs with regard to cash fl ow man-
agement that Canon’s management believes to be important.
Inventory turnover measured in days is a KPI because it
measures the adequacy of supply chain management.
Inventories have inherent risks of becoming obsolete, physically
ruined or otherwise decreasing signifi cantly in value, which may
adversely affect Canon’s operating results. To mitigate these
risks, management believes that it is crucial to continue reducing
inventories and decrease production lead times in order to
promptly collect related product expenses by strengthening
supply chain management.
Canon’s management seeks to meet its liquidity and capital
requirements primarily with cash fl ow from operations.
Management also seeks debt-free operations. For a manufacturing
company like Canon, it generally takes considerable time to real-
ize profi t from a business as the process of R&D, manufacturing
and sales has to be followed for success. Therefore, manage-
ment 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 exter-
nal funds for capital investments in favor of generating the nec-
essary funds from its own operations.
Canon Inc. stockholders’ equity to total assets ratio is another
KPI for Canon. Canon believes that its stockholders’ equity to
total assets ratio measures its long-term sustainability. Canon also
believes that achieving a high or rising stockholders’ equity ratio
indicates that Canon has maintained a good status or further
improved the constitution to fund debt obligations and other
unexpected expenses. In the long-term, Canon will be able to
maintain a high level of stable investments for its future opera-
tions and development. As Canon puts strong emphasis on its
research and development activities, management believes that it
is important to maintain a stable fi nancial base and, accordingly,
a high level of its stockholders’ equity to total assets ratio.
KEY PERFORMANCE INDICATORS
2009 2008 2007 2006 2005
Net sales (Millions of yen) ¥3,209,201 ¥4,094,161 ¥4,481,346 ¥4,156,759 ¥3,754,191
Gross profi t to net sales ratio 44.5% 47.3% 50.1% 49.6% 48.5%
R&D expense to net sales ratio 9.5% 9.1% 8.2% 7.4% 7.6%
Operating profi t to net sales ratio 6.8% 12.1% 16.9% 17.0% 15.5%
Inventory turnover measured in days 39 days 47 days 44 days 45 days 47 days
Debt to total assets ratio 0.3% 0.4% 0.6% 0.7% 0.8%
Canon Inc. stockholders’ equity to total assets ratio 69.9% 67.0% 64.8% 66.0% 64.4%
Note: Inventory turnover measured in 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 prepared in accor-
dance with U.S. generally accepted accounting principles
(“GAAP”) and based on the selection and application of signifi -
cant accounting policies which require management to make
signifi cant 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 fi nancial condi-
tion and results of operations.
Revenue recognition
Canon generates revenue principally through the sale of con-
sumer 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 transferred to the
customer or services have been rendered, the sales price is fi xed
or determinable, and collectibility is probable.
Revenue from sales of offi ce products, such as offi ce net-
work digital multifunction devices and laser printers, and con-
sumer products, such as digital cameras and inkjet multifunction
peripherals, 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 specifi c criteria of the
equipment functionality are successfully tested and demonstrat-
ed by Canon. Service revenue is derived primarily from separate-
ly 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 offi ce imaging products, for which the cus-
tomer 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 con-
tract 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-fi nancing leases is recognized over the life of
each respective lease using the interest method. Leases not
qualifying as sales-type leases or direct-fi nancing leases are
accounted for as operating leases and the related revenue is rec-
ognized ratably over the lease term. When equipment leases are
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