Canon 2010 Annual Report Download - page 49
Download and view the complete annual report
Please find page 49 of the 2010 Canon annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.CANON ANNUAL REPORT 2010 47
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 mea-
sures the adequacy of supply chain management. Inventories
have inherent risks of becoming obsolete, physically damaged
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 reduc-
ing inventories and decrease production lead times in order to
promptly recover 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 manufac-
turing company like Canon, it generally takes considerable time
to realize profi t from a business as the process of R&D, manu-
facturing and sales has to be followed for success. Therefore,
management 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 funds for capital investments in favor of generating
the necessary funds from its own operations.
Canon Inc. stockholders’ equity to total assets ratio is anoth-
er 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 strong fi nancial
position or further improved its ability 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 operations and development. As Canon puts strong
emphasis on its R&D 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
2010 2009 2008 2007 2006
Net sales (Millions of yen) ¥3,706,901 ¥3,209,201 ¥4,094,161 ¥4,481,346 ¥4,156,759
Gross profi t to net sales ratio 48.1% 44.5% 47.3% 50.1% 49.6%
R&D expense to net sales ratio 8.5% 9.5% 9.1% 8.2% 7.4%
Operating profi t to net sales ratio 10.5% 6.8% 12.1% 16.9% 17.0%
Inventory turnover measured in days 35 days 39 days 47 days 44 days 45 days
Debt to total assets ratio 0.3% 0.3% 0.4% 0.6% 0.7%
Canon Inc. stockholders’ equity to total assets ratio 66.4% 69.9% 67.0% 64.8% 66.0%
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 applica-
tion of its accounting policies that currently affect its fi nancial
condition 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 trans-
ferred 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 semicon-
ductor lithography equipment and LCD lithography equipment
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 demon-
strated by Canon. Service revenue is derived primarily from
separately priced product maintenance contracts on equip-
ment 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
recognized ratably over the lease term. When equipment leas-
es are bundled with product maintenance contracts, revenue is