Income Statement

1. Identify when Nike recognizes revenues. Does this timing

of revenue recognition seem appropriate? Explain.

Nike recognizes wholesale revenue when the said risks

and ownership are transferred to the said client that only
occurs when the buyer receives the product, Nike also
records retail shop income at the point of sale to the
costumer. Yes because it has supported 2 revenue
recognition and the first one is delivering products and
services to the client and to the point of being done
virtually in turn it met it’s liability on asset that can be
measured reliably.

2. 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.

Nike uses Inventories to measure cost of goods sold

because inventory are always at a lower cost or market
valued on average or really specific prices base on the
product profile on the market every company uses this
but then cannot always be used because using much of
specific identification can lead to well devastating
problems when dealing with big volumes of inventory.
Nike’s limited-edition shoes can be used as a good
example, but well for Nike they choose more average than
anything because some of their products are relatively
close in said price.

3. 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?

To simply state they don’t manufacture anything so the

next thing to look at on why depreciation doesn’t appear
 among its expenses on the income statement is it would
be on sales and administration.

4. What does “demand creation expense” represent?

It represents the marketing promotions those

endorsements, tv ads, digital promotions, print media
advertisements, brand deals, and retail brand
representations they are what “demand creation
expense” represent.

5. Identify the portion of Nike’s income tax expense of $863

million for 2016 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 2016 greater than the income
tax expense?

In the notes I found states that $943 million is payable to

government organizations and $80 million is deferred to
upcoming fiscal years. Because really it is based on tax
accounting rules and as a result the amount now payable
to the government entities in 2016 is more than the
income tax expense.

Balance Sheet

 f. Why do accounts receivable (net) appear net of

allowance for doubtful accounts? Identify the events or
transactions that cause the allowance account to increase
or decrease.
Accounts receivable appear net of allowance for doubtful
accounts because there are certain account that cannot be
received immediately upon sale or won’t be collected
 instantly also debt is in there that may cause the account
to grow or shrink.

 g. What is the largest asset (in dollar amount) on Nike’s

balance sheet? How does this asset relate to Nike’s
strategy?
The largest asset in dollar amount would be their
inventory at least $3,947 million dollars on their balance
sheet and this does align to what they really want to
accomplish and that is to grow their scope of sports,
product lines, and acquisitions for other apparel firms.

 h. Identify the depreciation method(s) that Nike uses for

its buildings and equipment. Does Nike’s choice of
depreciation method(s) seem appropriate?
Buildings and equipment are subject to depreciation
analysis. Yes, they have survived this long so there is no
need for change.

 i. Nike includes identifiable intangible assets on its

balance sheet. Does this account include the value of
Nike’s brand name and Nike’s “swoosh” trademark?
Explain.
No, the “swoosh” trademark are all original creations
including the brand name so the Nike-owned only
intangibles are included.
Statement of Cash Flows

 j. Why does the amount of net income differ from the

amount of cash flow from operations?
Because if you are calculating net income you should not
just when receiving money but also use accrual basis of
accounting as a result there can be said delay between
when the company expects to receive payment.

 k. Why does Nike add depreciation expense back to net

income when calculating cash flow from operations?
Depreciation only affects net income but does not harm or
cause cash outflows.

 l. Why does Nike subtract increases in accounts receivable

from net income when calculating cash flow from
operations for 2016?
Nike deducts increase in accounts receivable since they
result in less cash

 m. Why does Nike adjust net income by subtracting

increases in inventory and adding decreases in inventory
when calculating cash flow from operations?
It’s a really simple look here because of inventory if the
inventory gets too big or grows more than it should the
company will have less cash to work with and if it
decreases the company would have more cash at hand.
  n. When calculating cash flow from operations, why does
Nike adjust net income by adding increases and
subtracting decreases in accounts payable?
Nike doesn’t really pay to increase their cash on hand if
accounts payable are rising and decrease their cash on
hand.

 o. Cash flow from operations exceeded net income during

fiscal 2015, but not during fiscal 2016. Why? What caused
the big drop in cash flows provided by operations from
2015 to 2016?
The main reason why the big drop in cash is because of
decrease in accounts payable and from what I saw
between that year they were paying accounts payable so
in turn having less money at hand.

 P. What were Nike’s primary financing activities during

these three years?
During 3 years, they were purchasing common stock and
receiving dividends, both where common and preferred.

Relations between Financial Statement Items

 q. Compute the amount of cash collected from customers

during 2016.
Sales revenue: $32,376
Sales Revenue + change in Accounts receivable
Change in Accounts Receivable: $60
 $32,376 + $60 = $32,436
 r. Compute the amount of cash payments made to
suppliers of merchandise during 2016.
Ending Accounts Payable $2,191 – Beginning Accounts
Payable $2,131 = Change in Accounts Payable $60
Cost of sale + Change in inventory – Change in accounts
payable
Cost of sales: $17,405
Changes in inventories: $590
Change in Accounts Payable $60
$17,405 + $590 - $60 = $17,846

 s. Reconcile the change in retained earnings during 2016.

Beginning Retained Earnings + Net income – D = $4,151
$4,685 + $3,760 - $4,260 = $4,151
$4,185 = / = $4,151
Retained earning change as we can see in the result of the
computation it because of 3 factors and those are net
income, dividend payments and stock purchases and
during this the reconciliation we have found a
discrepancy that was $34 million.

Interpreting Financial Statement Relations

 t. Exhibit 1.28 presents common-size and percentage

change income statements for Nike for 2014, 2015, and
2016. What are some reasons for the increases in the net
income/sales revenue percentages for Nike between
2014 and 2015, and between 2015 and 2016?
 There were some behind the scene reason on why the
increase in net income or sales revenue percentages and
those are the reduce of cost of sale that increased gross
profit and another reason is reduced demand creation
cost.
 u. Exhibit 1.29 presents common-size and percentage
change balance sheets for Nike at the end of 2014, 2015,
and 2016. What is the likely explanation for the relatively
small percentages for property, plant, and equipment?
They outsourced the majority of sales and manufacturing
of its goods.
 v. What is the likely explanation for the relatively small
percentages for notes payable and long-term debt?
Simple Nike does not require any big quantity of capital to
finance and also they don’t incur a lot of debt and because
they outsource most of its manufacturing and retailing.