Financial Statement 2

Toyota Motor Corporation 07 August 2002 TOYOTA MOTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars Yen in millions in millions For the year ended For the year ended March 31 March 31, 2000 2001 2002 2002 Cash flows from operating activities: Net income Y 481,936 Y 674,898 Y 556,567 $ 4,177 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation 822,315 784,784 809,841 6,078 Provision for doubtful 33,755 27,131 44,407 333 accounts and credit losses Pension and severance 27,307 45,138 53,543 402 costs, less payments Loss on disposal of fixed 19,544 22,409 46,834 352 assets Unrealized (gains) losses (41,614) 13,377 - - on trading securities, net Unrealized losses on - - 179,649 1,348 available-for-sale securities, net Realized gain on disposition of ownership - (180,950) - - interest in telecommunication subsidiary Gain on securities contribution to employee - (161,151) - - retirement benefit trust Deferred income taxes 88,406 49,325 (142,811) (1,072) Minority interest in 7,632 12,129 10,835 81 consolidated subsidiaries Equity in earnings of (31,619) (103,614) (18,090) (136) affiliated companies Changes in operating assets and liabilities: (Increase) decrease in (86,911) (111,632) 61,997 465 notes and accounts receivable (Increase) decrease in (73,172) (49,374) 11,705 88 inventories (Increase) decrease in (169,200) 4,486 (253,993) (1,906) other current assets Increase (decrease) in 98,812 (7,911) (809) (6) accounts payable Increase (decrease) in (77,952) 141,525 74,888 562 accrued income taxes Increase (decrease) in (79,176) 220,357 139,954 1,050 other current liabilities Other 78,862 47,091 (41,857) (314) Net cash provided by 1,098,925 1,428,018 1,532,660 11,502 operating activities Cash flows from investing activities: Additions to finance (2,681,142) (3,697,376) (3,853,741) (28,921) receivables Collection of finance 1,961,026 2,801,160 2,453,540 18,413 receivables Proceeds from sale of 127,037 507,811 624,393 4,686 finance receivables Additions to fixed assets (838,309) (762,274) (940,547) (7,059) excluding equipment leased to others (838,309) (762,274) Additions to equipment (538,395) (439,132) (608,046) (4,563) leased to others Proceeds from sales of fixed assets excluding 80,375 61,265 56,525 424 equipment leased to others Proceeds from sales of 381,852 337,047 412,191 3,093 equipment leased to others Payments for investments (61,261) (70,906) (28,450) (214) and other assets Purchases of marketable securities and (1,144,839) (949,058) (653,756) (4,906) security investments Proceeds from sales of marketable securities 447,925 234,608 147,722 1,109 and security investments Proceeds on maturity of marketable securities 537,106 597,409 604,081 4,533 and security investments Decrease in time deposits 323,594 45,190 31,519 237 Payment for additional investments in affiliated (18,351) (34,204) (27,510) (206) companies, net of cash acquired Other 34,865 49,722 (28,732) (215) Net cash used in Y(1,388,517) Y(1,318,738) Y(1,810,811) $(13,589) investing activities The accompanying notes are an integral part of these financial statements. F-8 TOYOTA MOTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) U.S. dollars Yen in millions in millions For the year ended March 31, For the year ended March 31 2000 2001 2002 2002 Cash flows from financing activities: Purchase and retirement Y (45,929) Y (265,012) Y (285,236) $ (2,140) of common stock Proceeds from issuance 1,006,046 1,117,360 1,701,727 12,771 of long-term debt Payments of long-term (654,745) (958,475) (1,012,523) (7,599) debt Increase in short-term 332,853 28,039 73,884 554 borrowings Dividends paid (87,958) (88,625) (98,639) (740) Other - - 12,935 97 Net cash provided by 550,267 (166,713) 392,148 2,943 (used in) financing activities Effect of exchange rate changes on cash and (65,465) 39,057 32,271 242 cash equivalents Net increase (decrease) 195,210 (18,376) 146,268 1,098 in cash and cash equivalents Cash and cash 1,334,058 1,529,268 1,510,892 11,338 equivalents at beginning of year Cash and cash Y1,529,268 Y1,510,892 Y 1,657,160 $12,436 equivalents at end of year The accompanying notes are an integral part of these financial statements. F-9 TOYOTA MOTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of operations: Toyota Motor Corporation (the 'parent company') and its subsidiaries (collectively 'Toyota') are primarily engaged in the design, manufacture, assembly and sale of passenger cars, recreational and sport-utility vehicles, minivans, trucks and related parts and accessories throughout the world. In addition, Toyota provides retail and wholesale financing, retail leasing and certain other financial services primarily to its dealers and their customers related to vehicles manufactured by Toyota. 2. Summary of significant accounting policies: The parent company and its subsidiaries in Japan maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan, and its foreign subsidiaries in conformity with those of their countries of domicile. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America. These adjustments were not recorded in the statutory books. Significant accounting policies after reflecting adjustments for the above are as follows: Basis of consolidation and accounting for investments in affiliated companies - The consolidated financial statements include the accounts of the parent company and those of its majority-owned subsidiary companies. Certain foreign subsidiary results were reported in the consolidated financial statements using a December 31 year-end. During the year ended March 31, 2002, the year-ends of certain of these foreign subsidiaries were changed from December 31 to March 31. As a result, Toyota decreased retained earnings by Y3,061 million ($23 million) to reflect the impact of conforming the year-ends at March 31, 2001. All significant intercompany transactions and accounts have been eliminated. Investments in affiliated companies in which Toyota exercises significant influence, but which it does not control, are stated at cost plus equity in undistributed earnings. Consolidated net income includes Toyota's equity in current earnings of such companies, after elimination of unrealized intercompany profits. Investments in which Toyota does not exercise significant influence (generally less than a 20% ownership interest) are stated at cost. Estimates - The preparation of Toyota's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The more significant estimates include: warranty, allowance for doubtful accounts and credit losses, residual values for leased assets, impairment of long-lived assets, postretirement benefits costs and obligations and post-employment benefit costs and other than temporary losses on marketable securities. Translation of foreign currencies - All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at appropriate year-end current rates and all income and expense accounts are translated at rates that approximate those prevailing at the time of the transactions. The resulting translation adjustments are included as a component of accumulated other comprehensive income. Foreign currency receivables and payables are translated at appropriate year-end current rates and the resulting transaction gains or losses are taken into income currently. Revenue recognition - Revenue from sales of vehicles and parts is generally recognized upon delivery which is considered to have occurred when the dealer has taken title to the product and the risk and reward of ownership have been substantively transferred, except as described below. Provisions for sales allowances and incentives are recognized at the time of the sale. Revenue from the sale of vehicles under which Toyota conditionally guarantees the minimum resale value is recognized on a pro rata basis from the date of sale to the first exercise date of the guarantee in a manner similar to lease accounting. The underlying vehicles of these transactions are recorded as assets and are depreciated in accordance with Toyota's depreciation policy. Revenue from retail financing contracts and finance leases is recognized using the effective yield method. Revenue from operating leases is recognized on a straight-line basis over the lease term. Toyota on occasion sells finance receivables in transactions subject to limited recourse provisions. These sales are to trusts and Toyota retains the servicing and is paid a servicing fee. Gains or losses from the sales of the finance receivables are recognized in the period in which such sales occur. Other costs - Advertising and sales promotion costs are expensed as incurred. Advertising costs were Y260,529 million, Y276,596 million and Y319,657 million ($2,399 million) for the years ended March 31, 2000, 2001 and 2002, respectively. Estimated costs related to product warranties are accrued at the time of sale. Research and development costs are expensed as incurred and were Y451,177 million, Y475,716 million and Y589,306 million ($4,423 million) for the years ended March 31, 2000, 2001 and 2002, respectively. Cash and cash equivalents - Cash and cash equivalents include all highly liquid investments, generally with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates. Marketable securities - Marketable securities consist of debt and equity securities. Debt and equity securities designated as available-for-sale are carried at fair value with changes in unrealized gains or losses included as a component of accumulated other comprehensive income in shareholders' equity, net of applicable taxes. Should Toyota acquire securities in the future and designate them as held-to-maturity investments, such securities would be carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturity are reduced to net realizable value for other than temporary declines in market value. In determining if a decline in value is other than temporary, Toyota considers the length of time and the extent to which the fair value has been less than the carrying value, the financial condition and prospects of the company and Toyota's ability and intent to retain its investment in the company for a period of time sufficient to allow for any anticipated recovery in market value. Realized gains and losses, which are determined on the average cost method, are reflected in the statement of income. Allowance for credit losses - Allowances for credit losses are established based primarily on historical loss experience. Other factors affecting collectibility are also evaluated in determining the amount to be provided. Upon repossession of the collateral for a delinquent account, losses are charged to the allowance for credit losses and the estimated realizable value of the asset reflected in other assets. When it is determined the collateral cannot be recovered, losses are charged to the allowance for credit losses. Inventories - Inventories are valued at cost, not in excess of market, cost being determined on the 'average cost' basis, except for the cost of finished products carried by certain subsidiary companies which is determined on the 'specific identification' basis or 'last in, first out' ('LIFO') basis. Inventories valued on the LIFO basis totaled Y170,103 million and Y190,565 million ($1,430 million) at March 31, 2001 and 2002, respectively. Had the 'first in, first out' basis been used for those companies using the LIFO basis, inventories would have been Y34,457 million and Y23,375 million ($175 million) higher than reported at March 31, 2001 and 2002, respectively. During the year ended March 31, 2001 and 2002, certain vehicle inventory quantities accounted for on the LIFO basis were reduced. These reductions resulted in the liquidation of LIFO inventory layers. The effects of these liquidations were not material to Toyota's financial position or results of operations for the years ended March 31, 2001 and 2002. Property, plant and equipment - Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation of property, plant and equipment is mainly computed on the declining-balance method for the parent company and Japanese subsidiaries and on the straight-line method for foreign subsidiary companies at rates based on estimated useful lives of the assets according to general class, type of construction and use. Estimated useful lives range from 20 to 50 years for buildings and from 2 to 25 years for machinery and equipment. Vehicles and equipment on operating leases to third parties are originated by dealers and acquired by certain consolidated subsidiaries. Such subsidiaries are also the lessors of certain property that they acquire directly. Vehicles and equipment on operating leases are depreciated primarily on a straight-line basis over the lease term, generally three years, to the estimated residual value. Long-lived assets - Toyota reviews its long-lived assets, including goodwill and investments in affiliated companies stated at cost, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the assets carrying value over its fair value. Fair value is determined mainly using a discounted cash flow valuation method. Environmental matters - Environmental expenditures relating to current operations are expensed or capitalized as appropriate. Expenditures relating to existing conditions caused by past operations, which do not contribute to current or future revenues, are expensed. Liabilities for remediation costs are recorded when they are probable and reasonably estimable, generally no later than the completion of feasibility studies or Toyota's commitment to a plan of action. The cost of each environmental liability is estimated by using current technology available and various engineering, financial and legal specialists within Toyota based on current law. Such liability does not reflect any offset for possible recoveries from insurance companies and is not discounted. There were no material changes in the liability for all periods presented. Income taxes - The provision for income taxes is computed based on the pretax income included in the consolidated statement of income. The asset and liability approach is used to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Derivative financial instruments - Toyota employs derivative financial instruments, including foreign exchange forward contracts, foreign currency options, interest rate swaps, interest rate currency swap agreements and interest rate options to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Toyota does not use derivatives for speculation or trading purposes. Effective April 1, 2001, Toyota adopted Statement of Financial Accounting Standards ('FAS') No. 133, Accounting for Derivative Instruments and Hedging Activities, which has been amended by FAS No. 137 and No. 138 (see Note 19). FAS 133, as amended, requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges is recognized in earnings. Net income per share - Basic net income per common share is calculated by dividing net income by the weighted-average number of shares outstanding during the reported period; 3,757,276,120, 3,735,862,211 and 3,655,303,873 for the years ended March 31 2000, 2001 and 2002, respectively. The calculation of diluted net income per common share is similar to the calculation of basic net income per share, except that the weighted-average number of shares outstanding includes the additional dilution from assumed exercise of dilutive stock options. The effective of dilutive stock options was de-minims for the years ended March 31, 2000, 2001 and 2002. Stock-based compensation - Toyota measures compensation expense for its stock-based directors' compensation plan using the intrinsic value method. Other comprehensive income - Other comprehensive income refers to revenues, expenses, gains and losses that, under accounting principles generally accepted in the United States of America are included in comprehensive income, but are excluded from net income as these amounts are recorded directly as an adjustment to shareholders' equity. Toyota's other comprehensive income is primarily comprised of unrealized gains/ losses on marketable securities designated as available-for-sale, foreign currency translation adjustments and gains/losses on derivative instruments and adjustments to recognize additional minimum liabilities associated with Toyota's defined benefit pension plans. Recent pronouncements - In June 2001, the Financial Accounting Standards Board (FASB) issued FAS No. 141, Business Combinations. FAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. This statement specifies that certain acquired intangible assets in a business combination be recognized as assets separately from goodwill and that existing intangible assets and goodwill be evaluated for these new separation requirements. Management does not expect this statement to have a material impact on Toyota's consolidated financial position or results of operations. In June 2001, the FASB issued FAS No. 142, Goodwill and Other Intangible Assets. FAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. In addition, this statement requires that goodwill be tested for impairment at least annually at the reporting unit level. Toyota adopted FAS 142 on April 1, 2002. At March 31, 2002, the amount of unamortized goodwill is insignificant and management does not expect this statement to have a material impact on Toyota's consolidated financial position or results of operations. In June 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Toyota is required to adopt FAS No. 143 on April 1, 2003. Management does not expect this statement to have a material impact on Toyota's consolidated financial position or results of operations. In August 2001, the FASB issued FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. Toyota adopted FAS No. 144 on April 1, 2002. Management does not expect this statement to have a material impact on Toyota's consolidated financial position or results of operations. Reclassifications - Certain prior year amounts have been reclassified to conform to the fiscal 2002 presentation. 3. U.S. dollar amounts: U.S. dollar amounts presented in the consolidated financial statements and related notes are included solely for the convenience of the reader and are unaudited. These translations should not be construed as representations that the yen amounts actually represent, or have been or could be converted into, U.S. dollars. For this purpose, the rate of Y133.25 = U.S. $1, the approximate current exchange rate at March 29, 2002, was used for the translation of the accompanying consolidated financial amounts of Toyota as of and for the year ended March 31, 2002. 4. Supplemental cash flow information: Cash payments for income taxes were Y414,708 million, Y330,203 million and Y530,207 million ($3,979 million) for the years ended March 31, 2000, 2001 and 2002, respectively. Interest payments during the years ended March 31, 2000, 2001 and 2002 were Y237,155 million, Y250,405 million and Y241,251 million ($1,811 million), respectively. Capital lease obligations of Y81,701 million, Y31,252 million and Y2,888 million ($22 million) were incurred for the years ended March 31, 2000, 2001 and 2002, respectively. 5. Acquisitions and dispositions During the year ended March 31, 2001, Toyota's telecommunication subsidiary, IDO Corporation, merged with two Japanese telecommunication companies and Toyota's ownership interest in the surviving entity, DDI Corporation ('KDDI'), became 13.3%. As a result, Toyota recognized a Y180,950 million gain on the disposition of its IDO shares which is included 'Other income (loss), net' in the accompany consolidated statements of income and Toyota's consolidated financial statements no longer include the accounts of this former subsidiary from the merger date. The book values of assets and liabilities of IDO at the date of the merger are as follows: Yen in millions Assets Y603,627 Liabilities (571,150) During the year ended March 31, 2002, Toyota sold its industrial equipment businesses to an affiliated company. The results of operations and book values of assets and liability of the industrial equipment business were immaterial. The gain recognized by Toyota on the sale was immaterial. At March 31, 2001, Toyota had a 36.6% ownership interest in Hino Motor Corporation ('Hino') that was accounted for using the equity method. Hino is primarily engaged in the design, manufacture and sale of trucks, buses and related parts. In August 2001, Toyota acquired an additional ownership interest in Hino for Y66,287 million ($497 million) in cash. As a result, Toyota's ownership interests in Hino increased to 50.2% and Toyota's consolidated financial statements include the accounts of Hino from the acquisition date. The fair values of assets acquired and liabilities assumed at the date of acquisition based on the preliminary allocation of purchase price are as follows: U.S. dollars in Yen in millions millions For the year For the year ended ended March 31, March 31, 2002 2002 Assets acquired Y 829,413 $ 6,224 Liabilities assumed (674,154) (5,059) Minority interest (93,366) (701) Goodwill 4,394 33 Less - Cash acquired (34,801) (261) Net cash paid Y 31,486 $ 236 The following represents the unaudited pro forma results of operations of Toyota for the year ended March 31, 2001 and 2002, as if the additional ownership interest in Hino had been acquired as of April 1, 2000. The pro forma information, however, is not necessarily indicative of the results that would have resulted had the acquisition occurred at the beginning of the periods presented, nor is it necessarily indicative of future results. U.S. dollars in millions Yen in millions For the year ended For the year March 31, ended March 31, 2001 2002 2002 Net revenue Y13,620,493 Y14,552,408 $109,211 Net income 675,554 556,967 4,180 Net income per share : Basic Y180.83 Y152.37 $1.14 Diluted 180.83 152.37 1.14 During the years ended March 31, 2001 and 2002, Toyota made a number of other acquisitions, however assets acquired and liabilities assumed were immaterial. This information is provided by RNS The company news service from the London Stock Exchange

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