Case Study- NIKE: SOMEWHERE BETWEEN A SWOOSH AND A SLAM DUNK.
Required:
Study the financial statements and notes for Nike and respond to the following questions.
Income Statement
a. Identify the time at which Nike recognizes revenues. Does this timing of revenue recognition seem appropriate? Explain.
b. Identify the cost-flow assumption(s) that Nike uses to measure cost of goods sold. Does Nike's choice of cost-flow assumption(s) seem appropriate? Explain.
c. Nike reports property, plant, and equipment on its balance sheet and discloses the amount of depreciation for each year in its statement of cash flows. Why doesn't depreciation expense appear among its expenses on the income statement?
d. Identify the portion of Nike's income tax expense of $469.8 million for 2009 that is currently payable to governmental entities and the portion that is deferred to future years. Why is the amount currently payable to governmental entities in 2009 greater than the income tax expense?
Balance Sheet
e. Why do accounts receivable appear net of allowance for doubtful accounts? Identify the events or transactions that cause the allowance account to increase or decrease.
f. Identify the depreciation method(s) that Nike uses for its buildings and equipment. Does Nike's choice of depreciation method(s) seem appropriate?
g. Nike includes identifiable intangible assets on its balance sheet as an asset. Does this account include the value of the Nike name and Nike's "swoosh" trademark? Explain.
h. Nike includes deferred income taxes among current assets, noncurrent assets, and noncurrent liabilities. Under what circumstances will deferred income taxes give rise to an asset? To a liability?
i. Nike reports accumulated other comprehensive income of $367.5 million at the end of 2009 and $251.4 million at the end of 2008, implying that other comprehensive income items amounted to $116.1 million during 2009. Why is this "income" reported as part of shareholders' equity and not part of net income in the income statement?
Statement of Cash Flows
j. Why does the amount of net income differ from the amount of cash flow from operations?
k. Why does Nike add depreciation expense back to net income when calculating cash flow from operations?
l. Why does Nike subtract deferred income taxes from net income when calculating cash flow from operations for 2009?
m. Why does Nike subtract increases in accounts receivable to net income when calcu- lating cash flow from operations for 2009?
n. Why does Nike adjust net income by subtracting increases in inventory and adding decreases in inventory when calculating cash flow from operations?
o. When calculating cash flow from operations, why does Nike adjust net income by adding increases and subtracting decreases in accounts payable and other current liabilities?
p. Nike recognized a gain from the divestiture of the subsidiary for the Bauer line of hockey apparel and equipment in 2008. Why does Nike subtract the gain on the divestiture from the operating activities? Why does Nike include the proceeds from the divestiture as an investing activity?
q. Given that notes payable appear on the balance sheet as a current liability, why does Nike include increases in this liability as a financing activity rather than as an oper- ating activity?
Relations between Financial Statement Items
r. Compute the amount of cash collected from customers during 2009.
s. Compute the amount of cash payments made to suppliers of merchandise during 2009.
t. Prepare an analysis that accounts for the change in the property, plant, and equip- ment account and the accumulated depreciation account during 2009. You will have to plug certain amounts if Nike does not disclose them.
u. Identify the reasons for the change in retained earnings during 2009.
Interpreting Financial Statement Relationships
v. Exhibit 1.35 presents common-size and percentage change income statements for Nike for 2007, 2008, and 2009. What are the likely reasons for the higher net income/sales revenue percentages for Nike between 2007 and 2008? What are the likely reasons for the lower net income/sales revenue percentages for Nike between 2008 and 2009?
w. What are the likely reasons for the decrease in the cost of goods sold to sales percent- ages between 2007 and 2009?
x. What are the likely reasons for the increase in the selling and administrative expenses to sales percentages between 2007 and 2009?
y. Exhibit 1.36 presents common-size and percentage change balance sheets for Nike at the end of 2007, 2008, and 2009. What is the likely explanation for the relatively small percentages for property, plant, and equipment?
z. What is the likely explanation for the relatively small percentages for notes payable and long-term debt?
aa. What is the likely explanation for the small decreases in property, plant, and equip- ment for Nike for 2008 and 2009?
bb. Refer to the statement of cash flows for Nike in Exhibit 1.33. Cash flow from opera- tions exceeded net income during all three years. Why?
cc. How has Nike primarily financed its acquisitions of property, plant, and equipment during the three years?
dd. What are the likely reasons for the repurchases of common stock during the three years?
ee. The dividends paid by Nike increased each year ($343.7 million in 2007, $412.9 mil- lion in 2008, and $466.7 million in 2009). Given that Nike repurchased its stock each year, what is the likely explanation for the increasing amount of dividends?