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Nike’s Form 10-K – Historical Costs

Sandra Armenta

South University Online

Professor Emily Baculik

July 1, 2011


Nike’s Form 10-K – Historical Costs

Financial statements are important for a firm to determine their financial status and

profitability. Companies have the task of determining whether to report financial items at the

historical cost, which is the acquisition cost minus depreciation, or at the fair value, which is the

market value of the item at the time the report is prepared. At times it may be more beneficial to

report using a combination of both historical cost and fair value cost.

In reviewing the Balance Sheet included in Nike’s Form 10-K, we can evaluate which

items would be recognized at historical costs. In general, most assets and liabilities are reporting

using the historical cost, however “the information provided in the balance sheet is often

criticized for not reporting a more relevant fair value” (Kieso, Weygandt, & Warfield, 2010, p.

179). Using historical costs can cause some items to be undervalued while others are

overvalued.

Current assets and current liabilities could be overstated for various reasons. Current

assets could be overstated as inflation causes fluctuation in the prices. For example, if

inventories are recorded at $200,000, but the current acquisition prices of those items in

inventory have reduced by 10%, the actual value, or fair value would only be $180,000. Current

liabilities can also be overstated if the actual value of these liabilities has changed. For example,

you may have Accounts Payable recorded at the historical cost of $350,000, but there have been

changes due to discounts and returned items.

Long term assets and liabilities can also be understated due to appreciation on the asset

such as property. The economy has a lot to do with the changes in the value of long term assets

and liabilities. For example, long term debt can be overstated if interest rates go down on, which

would reduce the amount of long term debt that is currently owed.


Nike appears to disclose the fair market value on the notes to the financial statements.

This is a requirement of the FASB under SFAS No. 157 which “defines fair value, establishes a

framework for measuring fair value in accordance with [GAAP], and expands disclosures about

fair value measurements” (Nike, 2007, p. 59). Accountants and Executives of the company may

prefer to see a more accurate accounting of assets and liabilities as well, which requires the notes

to the financial statements to include this information.

The total assets listed on their balance sheet as of May 31, 2007 are approximately $10.7

million, which seems a little low. Nike is a popular company with a large variety of products, in

fact the NK-10 form describes them as “the largest seller of athletic footwear and athletic apparel

in the world” (Nike, 2007, p. 2). They also sell under other brand names such as Converse,

Exeter Brands Group, Hurley, NIKE Bauer Hockey and NIKE.

Current liabilities are valued at approximately $2.6 million. A liability is determined to

be a current liability based on the amount of time it will take to pay it. Current liabilities will be

paid within one year. For example, long term debts are debts that it will take more than one year

to pay, however, the amount to be paid within the current year is reported under current liabilities

as “Current portion of long term debt”.

The notes to the financial statements prepared by Nike appeared to be very adequate. It

was very detailed and provided specific information about all the categories of the financial

statements. It also informed the reader of their reasoning for the reporting processes, including

regulatory requirements.

Financial statements are an important asset for determining the financial status of a

company. Reporting this information using historical costs can be advantageous in some cases,

but disastrous in others. It is important to determine which is the reporting procedure would be


the best for the company. Preparing detailed notes to accompany the financial statements is also

very informative to the readers of this information. It can not only provide additional

clarification on some items, it can help to understand the entire reasoning behind the reporting

process.


References

Kieso, D., Weygandt, J, and Warfield, T. (2010). Intermediate Accounting, 13th Edition.

Hoboken, NJ: John Wiley and Sons

Nike (2007, May 31). Nike Form 10-K. Retrieved from

http://docsharing.next.ecollege.com/%28NEXT%2800985e85e3%29%29/Main/

CourseMode/DocSharing/ListCategoriesAndFilesView.ed#

http://docsharing.next.ecollege.com/(NEXT(00985e85e3))/Main/CourseMode/DocSharing/ListCategoriesAndFilesView.ed



Nike’s Form 10-K

Balance Sheet and Statement of Cash Flow

Sandra Armenta



July 7, 2011


Nike’s Form 10-K – Balance Sheet and Statement of Cash Flow

The balance sheet and the statement of cash flow are two very important financials

reports that a company provides to investors, creditors, executives and stockholders. The

balance sheet reports the assets, liabilities and stockholders’ equity during the reporting period

indicated (Kieso, Weygandt, & Warfield, 2010, p. 178). The balance sheet provides the

information needed to assess the “company’s liquidity, solvency and financial flexibility”

(Kieso, Weygandt, & Warfield, 2010, p. 178). The statement of cash flow is useful as it “reports

cash receipts, cash payments, and net change in cash resulting from a company’s operating,

investing and financing activities during a period” (Kieso, Weygandt, & Warfield, 2010, p.

1244).

The balance sheet can be prepared in two different formats, account form and report

form. The account format has all assets listed on the left side of the page and the liabilities and

stockholders’ equity on the right side of the page. The report format lists assets and then below

that the liabilities and below liabilities is the stockholders’ equity. In reviewing the financial

reports on Nike’s Form 10-K, we can establish that the format of their balance sheet is the report

format.

Most assets and liabilities are recorded on the balance sheet at historical values, but some

items can be recorded at fair value. According to the Notes to the Consolidated Financial

Statements, Nike uses fair value for certain items. The items reported at fair value are cash and

cash equivalents, available for sale debt securities, derivatives, notes payable and long term debt.

Reporting these items at fair value is an excellent choice. As the value of the dollar changes, the

value of cash and cash equivalents will change, so reporting at fair value gives a more accurate


value in the balance sheet. For all other items over time the interest rates and changes in

economy can change the value of these items. Reporting them at fair value allows them the

ability to provide the most accurate information in the balance sheet. They also indicated in the

notes that for one of the subsidiaries, Exeter Group, all assets and liabilities are recorded at fair

value.

In assessing liquidity based on the balance sheet, cash and cash equivalents are the most

liquid, followed by all current assets. Current assets are considered most liquid because the cash

will be obtained within the current year. The least liquid of all assets would be goodwill. For

the company to obtain cash for goodwill, they would need to sell the company. On Nike’s Form

10-K, goodwill, patents and trademarks are included in intangible assets. These items are

considered intangible assets because they “lack physical substance and are not financial

instruments” (Kieso, Weygandt, & Warfield, 2010, p. 186).

Nike’s long term debts consist of Corporate Bonds payable and Japanese Yen notes

payable. The additional long term liabilities are listed under deferred income taxes and other

liabilities and commitments and contingencies. These areas include all items expected under

long term liabilities.

The statement of cash flow also provides important information. This financial report

can show where the most amount of cash is received and where the most amount of cash is used.

On Nike’s Form 10-K Consolidated Statement of Cash Flow, the biggest source of cash was

maturities of short-term investments in the amount of $2,516.2 million. The purchase of short

term investments was the biggest use of cash in the amount of ($2,133.8)

The balance sheet and the statement of cash flow both provide investors, creditors,

executives and stockholders with important information about the company. The balance sheet


shows the liquidity, solvency and financial flexibility of the company, while the cash flow

statement shows the change in cash from the previous reporting period and where the most cash

is obtained and the most cash is used. This information gives company executives the necessary

information to make any changes necessary to increase financial stability.


References









Nike’s Form 10-K

Income Statement and Revenue Recognition Policy

Sandra Armenta



July 15, 2011


Nike’s Form 10-K – Income Statement and Revenue Recognition Policy

The income statement is another important financial statement that helps to evaluate past

performance as well as the probability that a certain level of cash flows will be achieved in the

future. There are also limitations to the income statement since items that cannot be measured

reliably will be omitted and income amounts are based on estimates (Kieso, Weygandt, &

Warfield, 2010, p. 132). The income statement can be completed in two ways; a multiple step

income statement or a single step income statement. The multiple step income statement is more

detailed and it separates operating and nonoperating activities. The single step income statement

only shows revenues and expenses.

In a large company such as Nike, which has different subsidiaries located in different

countries, the single step is the most convenient format to use. Including Notes to the

Consolidated Financial Statements can help to inform the reader of any missing details in the

income statement. As indicated in their notes to the consolidated financial statements, they use

estimates in several areas, including revenues and expenses (Nike, 2007, p. 39). I don’t see a

need to use estimates in these areas because the income statement is completed at the end of the

year based on the activities for the year. The actual amount of revenues and expenses should be

available which would negate the need for estimates. Goodwill is another area that Nike uses

estimates for, which is understandable because it is hard to measure goodwill so it is estimated at

fair value.

Nike’s primary revenue source is their line of footwear with revenue of $8,514 million in

2007 and their apparel line with revenue of $4,576.5 million in 2007. The gross margin as a

percentage of sales for 2007 was 43.88%, which was down slightly from 2006 which was at


44.05%. Over the three year period reported on the Statement of Income, they have stayed very

close to a percentage of 44% (Nike, 2007, p. 50).

For Nike, the geographical area that has the highest amount of net revenues is the United

States. This is as I would expect, due to the popularity of Nike with not just teenagers but with

adults as well. In addition, according to the notes to their financial statement, ‘The Company’s

largest concentrations of long-lived assets are in the United States and Japan” (Nike, 2007, p. 77).

However these long lived assets in the United States are substantially higher than those in Japan.

Nike has various revenue recognition policies due to their diverse operations. Wholesale

revenues are recognized when the title passes to the customer. Depending on the agreement with

the customer, this could be upon shipment or upon receipt. This could also vary based on the

country where the sale is made. For retail sales, revenue is recognized at the time of the sale

(Nike, 2007, p. 40).

With their many subsidiaries, Nike has many customers that they sell to, in many

different countries. The major customer that Nike has included in its revenue is Foot Locker.

This seems appropriate since their highest revenues come from the sale of foot wear. In 2007,

2006, and 2007, “revenues derived from Foot Locker, Inc. represented 10 percent, 10 percent

and 11 percent of the Company’s consolidated revenues, respectively” (Nike, 2007, p. 77)

The income statement provides useful information on the revenues and expenses that the

company has experienced for the year. The single step method is not as detailed as the multiple

step income statement, but it provides the important financial figures needed to assess the current

performance compared to prior years. With either format the notes to the consolidated financials

is just as important as it gives additional details that are needed in making an assessment. The


revenue recognition policy, geographical areas that are the most profitable and the major

customers that revenue is obtained from are very useful to the readers. These are the types of

things found in the notes to the financials.


References









Nike’s Form 10-K

Cash, Receivables and Inventory

Sandra Armenta



July 22, 2011


Nike’s Form 10-K – Cash, Receivables, and Inventory

The balance sheet also provides important information to management, investors and

creditors. “By providing information on assets, liabilities, and stockholders’ equity, the balance

sheet provides a basis for computing rates of return and evaluating the capital structure of the

enterprise” (Kieso, Weygandt, & Warfield, 2010, p. 178). One very important part of the

balance sheet is the current assets which include the cash and cash equivalents, receivables and

inventory. The notes to the consolidated financial statements also provide very important

information and explanations necessary to understand the financial statement preparation.

Current assets are listed on the balance sheet in order of liquidity, so the first item is cash

and cash equivalents (Kieso, Weygandt, & Warfield, 2010, p. 181). These are the most liquid of

the current assets. Cash is any currency on hand or any deposits that are in a financial institution

that can be obtained easily. Cash equivalents are other highly liquid short term assets or

investments. Nike, Inc. reports in their notes to the financial statements that cash equivalents

represent “short-term, highly liquid investments with maturities of three months or less at date of

purchase” (Nike, 2007, p. 54). They also indicate that the amounts reported for cash and cash

equivalents are approximate fair value.

The next liquid asset listed on the balance sheet is the current accounts receivables. They

have reported in the notes to the financial statements that “Accounts receivable with anticipated

collection dates greater than twelve months from the balance sheet date and related allowances

are considered non-current and recorded in other assets” (Nike, 2007, p. 55). In the current

accounts receivable, the do allow for bad debt, but it is not listed separately on the balance sheet.

They record the net amount of accounts receivables on the balance sheet and the notes to the


financial statements reports the amounts of uncollectable accounts receivable were recorded. For

May 31, 2007, they recorded $71.5 million in uncollectable accounts receivable, however, $33.3

million applied to non-current assets that were recorded in other assets (Nike, 2007, p. 55). In

calculating the allowance for bad debts, they look at the historical amount of credit losses they

have experienced and review the creditworthiness of significant customers (Nike, 2007, p. 55).

Inventory is the next liquid asset listed on the balance sheet. Nike uses various valuation

methods based on whether it is wholesale operations or retail operations. In the wholesale

operation valuations are based “on a first-in, first-out (“FIFO”) or moving average cost basis”

(Nike, 2007, p. 55). In the retail operations “the valuation of inventories at cost is calculated by

applying a cost-to-retail ratio to the retail value inventories” (Nike, 2007, p. 55).

The balance sheet shows that all current assets have increased from the previous year

except short term investments. The total current assets increased from $7,346.0 million in 2006

to $8.076.5 million in 2007. This increase could be attributed to an increase in sales and a

decrease in bad debts. Cash and cash equivalents are almost double in 2007 compared to 2006.

The largest percentage of current assets is accounts receivable, at $2,294.7 million. This is

expected as sales most likely increased.

The numbers in the balance sheet show that Nike is not only a well-known company, but

they are still growing and remain extremely profitable. The increase in accounts receivable and

inventories show that sales have possible increased. The large increase in cash and cash

equivalents could be an indication that bad debts have decreased. The notes to the financial

statements have provided the information needed to properly analyze the information provided in

the balance sheet.


References









Nike’s Form 10-K

Inventory Reserves, Property, Plant & Equipment & Gains and Losses

Sandra Armenta



July 29, 2011


Nike’s Form 10-K – Inventory Reserves, Property, Plant & Equipment & Gains and Losses

The balance sheet contains a large amount of important data to help in evaluating the

financial stability of a company. We previously reviewed inventories, but many companies

create inventory reserves. The balance sheet also provides the value of property, plant and

equipment. The results of all this information reported on the balance sheet also reveals any

gains or losses the company experienced during the period.

Inventory reserves are reported in an “asset contra account, in which a company retains

an estimated charge for inventory that it has not yet specifically identified . . .” (Bragg, 2011,

para. 1). This missing inventory could be caused by spoilage or theft. In this case it should be

recorded at a value lower than the originally recorded cost. This is considered a conservative

approach since the company is taking the initiative to estimate their losses in inventory before

they have confirmed that a loss has occurred (Bragg, 2011, para. 4).

Nike, Inc. reports inventory reserves “as a charge to cost of sales” (Nike, 2007, p. 40).

Nike bases their estimates of reserves on assumptions regarding future demand and the market

conditions. As reported in the notes to the consolidated financial statements, Nike Inc. (2007)

states:

“If we estimate that the net realizable value of our inventory is less than the cost

of the inventory recorded on our books, we record a reserve equal to the

difference between the cost of the inventory and the estimated net realizable

value” (p. 40).


I do not agree with this method of reporting reserves. This appears to be simply

recording the difference creating an inventory reserve account based on the difference of lower-

of-cost-or-market. This is just a difference in the value of the inventory currently on hand, not

an actual reserve based on missing inventory items. I think the reserve should be reported as the

difference between perpetual inventory and physical inventory at the end of the period.

Nike Inc. uses the retail inventory method for their retail operations. Under the method

they use, “the valuation of inventories at cost is calculated by applying a cost-to retail ratio to the

retail value inventories” (Nike, 2007, p. 55). To maintain this cost-to-retail relationship,

markdowns, whether permanent or point of sale, reduce both the retail and cost components of

the inventory on hand (Nike, 2007, p. 55). Inventories are assets, but more durable assets would

be property, plant and equipment.

Property, plant and equipment include land, buildings and equipment. Property, plant

and equipment have three major characteristics: “(1) They are acquired for use in operations and

not for resale. (2) They are long-term in nature and usually subject to depreciation. (3) They

possess physical substance.” (Kieso, Weygandt, and Warfield, 2010, p. 490).

Included in the property, plant, and equipment reported for Nike, Inc. are land, buildings,

machinery and equipment, leasehold improvements, construction in process, computer hardware

and software, and accumulated depreciation (Nike, 2007, p. 41 & 60). These items are reported

at cost, although if there is an indication that the carrying value is impaired, they “estimate the

future undiscounted cash flows to be derived from the asset to determine whether or not a

potential impairment exists” (Nike, 2007, p. 41). These undiscounted cash flow estimates may


change in the future for various reasons including “technological changes, economic conditions,

changes to our business operations or inability to meet business plans” (Nike, 2007, p. 41).

Machinery and equipment is the largest portion of the total property, plant and

equipment, with a balance of $1,817.2 million in 2007 (Nike, 2007, p. 60). This is not unusual

since they manufacture multiple products and have multiple locations where this machinery and

equipment is located. Construction in process makes up the smallest portion of the balance at

$94.4 million. With worldwide facilities, they probably don’t have much need for new land or

buildings, but they could anticipate expanding their operations to more countries than they are

already present in.

I think it would be valuable to give more detail on the face of the balance sheet by

expanding property, plant and equipment to list all the assets. This would give the reader a clear

view of where the most money is invested in long term assets, without having to refer to the

notes to the consolidated balance sheet. Current assets have been somewhat expanded, so it

would make sense to expand on the long term assets.

In reviewing the Income Statement, there are no obvious gains and losses reported.

However, if the notes are reviewed, it explains what is included in some of the reported items.

For example, Other (income) expense, net refers to notes 5 and 16. If you refer to the notes

provided by Nike, Inc. (2007), it is stated that:

Other (income) expense, net is comprised substantially of gains and losses

associated with the conversion of non-functional currency receivables and

payables, the re-measurement of foreign currency derivative instruments,


disposals of fixed assets, as well as other unusual or non-recurring transactions

that are outside the normal course of business (p. 27).

I think the gains and losses are reported this way, because it is not obvious by looking at

the income statement if there were any gains or losses. If the losses are substantial, it is not

immediately identifiable. The details are found only in the notes to the consolidated financial

statement.

The balance sheet of Nike, Inc. has provided a large amount of important data. There are

changes that can be made to make this report clearer to the readers, such as investors and

creditors. Expanding on property, plant and equipment and expanding the income statement to

clearly state gains and losses are a few areas that would make these statements more valuable.

Inventory reserves are an excellent way to report discrepancies in inventory items due to theft or

spoilage.


References

Bragg, S. (2011, February 1). What is an inventory reserve? Accounting Tools. Retrieved from

http://www.accountingtools.com/questions-and-answers/what-is-an-inventory-

reserve.html








http://www.accountingtools.com/questions-and-answers/what-is-an-inventory-reserve.html

http://www.accountingtools.com/questions-and-answers/what-is-an-inventory-reserve.html


Nike’s Form 10-K

Depreciation and Impairments

Sandra Armenta



August 2, 2011


Nike’s Form 10-K – Depreciation and Impairments

There are various adjustments that affect the assets on the balance sheet and net income

on the income statement. The most common are depreciation and impairments. These are

applied to long-term assets and reduce the book value of the asset. This creates a decrease in

total assets and a decrease in net income.

Depreciation is applied to long-term assets under property, plant, and equipment. Assets

such as buildings, machines, office equipment, and delivery equipment depreciate over the life of

the asset. To record this, a company will use depreciation. “Depreciation is the accounting

process of allocating the cost of tangible assets to expense in a systematic and rational manner to

those periods expected to benefit from the use of the asset” (Kieso, Weygandt, & Warfield, 2010,

p. 540). There are several methods of depreciation, including the activity method which is based

on the unit it produces or the number of hours it works (Kieso, Weygandt, & Warfield, 2010, p.

543). Another method is the straight line method which is the most commonly used. A third

method is the decreasing charge method where the depreciation is higher in the early years and

decreases in later years (Kieso, Weygandt, & Warfield, 2010, p. 544). Two ways to apply the

decreasing charge method are the sum-of-the-years’-digits method and the declining-balance

method.

Nike, Inc. depreciates property, plant and equipment using the straight line method. They

determine the useful life of each asset. Buildings and leasehold improvements are depreciated

over 2 to 40 years, machinery and equipment are depreciated over 2 to 15 years and computer

software is depreciated over 3 to 10 years (Nike, 2007, p. 55). When circumstances arise that

result in a difference between the estimated and actual useful life of the asset, Nike, Inc. adjusts


their “depreciation expense over the remaining useful life to depreciate the asset’s net book value

to its salvage value” (Nike, 2007, p. 41).

Impairment is the second form of adjustment made that will affect the value of assets on the

balance sheet and the income statement. “Impairment is the condition that exists when the

carrying amount of a long-lived asset (asset group) exceeds its fair value” (“Impairment”, n.d.).

To determine if there is an impairment loss, the company must first review any events or

circumstances that have changed to identify any possible impairment. If this review reveals an

impairment, they must perform a recoverability test. “If the sum of the expected future net cash

flows from the long-lived asset is less than the carrying amount of the asset, an impairment has

occurred” (Kieso, Weygandt, & Warfield, 2010, p. 552). Then once it is obvious there is an

impairment, they must calculate the amount of the loss. This amount is the difference between

the carrying amount of the asset and the fair value (or market value) of the asset.

Nike, Inc. discusses impairments in the notes to the consolidated financial statement

under property, plant and equipment. “When events or circumstances indicate that the carrying

value of property, plant and equipment may be impaired, we estimate the future undiscounted

cash flows to be derived from the asset to determine whether or not a potential impairment

exists” (Nike, 2007, p. 41). The impairment is calculated as the difference between the carrying

value and their estimate of the fair value, and the net value of these impairment charges are

recorded under other expense (or income). Economic and circumstantial changes may affect the

estimates of undiscounted cash flows, which “may result in impairment charges in the period in

which such changes in estimates are made” (Nike, 2007, p. 41)

.


Adjustments are not always clearly identified on the financial statements. The notes to

the consolidated financial statements are important for explaining these adjustments. Nike, Inc.

has clearly explained their method for making these adjustments, including the useful life of their

long-term assets. It also clearly states the alternatives taken when changes take place that affect

these adjustments.


References

Financial Accounting Standards Board (n.d.). Impairment. Retrieved

http://asc.fasb.org/glossary&letter=I








http://asc.fasb.org/glossary&letter=I

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