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?
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?
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 calculating 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 operating activity?
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 property, plant, and equipment and accumulated depreciation 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.
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 percentages 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?
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z. What is the likely explanation for the relatively small percentages for notes payable and long-term debt?
a.a. What is the likely explanation for the small decreases in property, plant, and equipment for Nike for 2008 and 2009?
b.b. Refer to the statement of cash flows for Nike in Exhibit 1.33. Cash flow from operations exceeded net income during all three years. Why?

c.c. How has Nike primarily financed its acquisitions of property, plant, and equipment during the three years?
d.d. What are the likely reasons for the repurchases of common stock during the three years?
e.e. The dividends paid by Nike increased each year ($343.7 million in 2007, $412.9 million 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?
Nike, Inc.'s principal business activity involves the design, development, and worldwide marketing of high-quality footwear, apparel, equipment, and accessory products for serious and recreational athletes. Almost 25,000 employees work for the firm as of 2009. Nike boasts the largest worldwide market share in the athletic footwear industry and a leading market share in sports and athletic apparel.
This case uses Nike's financial statements and excerpts from its notes to review important concepts underlying the three principal financial statements (balance sheet, income statement, and statement of cash flows) and relations among them. The case also introduces tools for analyzing financial statements.
Industry analysts debate whether the athletic footwear and apparel industry is a performance driven industry or a fashion-driven industry. Proponents of the performance view point to Nike's dominant market position, which results in part from continual innovation in product development. Proponents of the fashion view point to the difficulty of protecting technological improvements from competitor imitation, the large portion of total expenses comprising advertising, the role of sports and other personalities in promoting athletic shoes, and the fact that a high percentage of athletic footwear and apparel consumers use the products for casual wear rather than the intended athletic purposes (such as playing basketball or running).
There are only modest growth opportunities for footwear and apparel in the United States. Concern exists with respect to volume increases (how many pairs of athletic shoes will consumers tolerate in their closets) and price increases (will consumers continue to pay prices for innovative athletic footwear that is often twice as costly as other footwear).
Athletic footwear companies have diversified their revenue sources in two directions in recent years. One direction involves increased emphasis on international sales. With dress codes becoming more casual in Europe and East Asia and interest in American sports such as basketball becoming more widespread, industry analysts view international markets as the major growth markets during the next several years. Increased emphasis on soccer (European football) in the United States aids companies such as Adidas that have reputations for quality soccer footwear.
The second direction for diversification is sports and athletic apparel. The three leading athletic footwear companies capitalize on their brand name recognition and distribution channels to create a line of sportswear that coordinates with their footwear. Team uniforms and matching apparel for coaching staffs and fans have become a major growth avenue. For example, to complement Nike's footwear sales, Nike acquired Umbro, a major brand-name line of jerseys, shorts, jackets, and other apparel in the soccer market?
Essentially all athletic footwear and most apparel are produced in factories in Asia, primarily China (40%), Indonesia (31%), Vietnam, South Korea, Taiwan, and Thailand. The footwear companies do not own any of these manufacturing facilities. They typically hire manufacturing representatives to source and oversee the manufacturing process, helping to ensure quality control and serving as a link between the design and the manufacture of products. The manufacturing process is labor-intensive, with sewing machines used as the primary equipment. Footwear companies typically price their purchases from these factories in U.S. dollars?

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Exhibit 1.35 Common-Size and Percentage Change Income Statements for Nike (Case 1.2) Common-Size Income Statements Percentage Change Income Statements Compound Growth Fiscal Years Ended May 31 Revenues Cost of sales 2007 2008 2009 2008 2009 100.0% (55.0) 45.0% (32.0) 0.0 0.0 0.0 0.0 13.096 0.6 (0.2) 13.4% (3.3) 10.1% 14.1% 11.7 17.1 184 n.m. n.m. n.m. n.m. 13.7 (0.9) 20% 3.2 2.6 3.3 n.m. n.m. n.m. n.m. 100.0% 100.0% 8.496 43.9% (30.8) 0.0 0.0 0.0 0.0 13.1% 0.7 (0.3) 13.5% (4.4) 9.196 7.4 9.6 10.6 n.m. n.m. n.m. n.m. (45) (348) Gross Profit Selling and administrative expenses Restructuring charges Goodwill impairment Intangible and other asset impairment Other income (expenses) 44.9% 0.5 10.296 0.3 Operating Income Interest and other income Interest expense Income before income taxes Provision for income taxes 3.9 (21.8) (24.2) 10.3% (25) 7.8% 138 (125) 26.3 (5.7) (18.6) (02) Net Income Exhibit 1.36 Common-Size and Percentage Change Balance Sheets for Nike (Case 1.2) Common-Size Balance Sheets Percentage Change Balance Sheets Compound Growth As of Fiscal Year End May 31 2007 2008 2009 2009 ASSETS Current Assets Cash and equivalent:s Short-term investments Accounts receivable Inventories Prepaid expenses and other assets Deferred income taxes, net 17.496 9.3 23.3 19.9 17.3% 8.8 21.8 17.8 5.8 2.0 735% 32.1% (173) 14.8% 3.5 14.9% (35.2) 12.0 14.9 53.2 74% 5.2 19.6 4.8 1.8 71.0% 33.0% (17.8) 15.2% 6.0 3.6 813 3.2 (33) 27.1 19.9 10.1 3.7 3.9 3.5 8.4 75 54 395 113 98 8.4 2.0 755% 33.9% Total Current Assets Property and equipment, gross Accumulated depreciation Property and equipment, net Identifiable intangible assets Goodwill Deferred income taxes and other assets 9.4 14.0 12.7 81.3 243.1 32.5 16.4 15.7% 3.8 1.2 (56.9) 72.4 65 8.0 68 21.6 51.1 113 6.8 100096 Total Assets 100.0% 100.0% Exhibit 1.36 (Continued) Common-Size Balance Sheets Percentage Change Balance Sheets Compound As of Fiscal Year End May 31 2007 2008 2009 2008 2009 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable 0.1% (79.3) 76.3 23.8 35.2 407.9 93.0 (19.9) 0.3% 0.2% 2.6 7.8 13.4 0.7 24.7% 3.3 6.4 34.4% 0.0 9.7 122 84.4 (0.4) 17.0 10.3 0.7 26.7% Total Current Liabilities Long-term debt Deferred taxes and other long-term liabilities 28.5 7.6 27.8 26.1 0.0 12.6 3.3 12.2 11.5 0.0 24.2% (0.9) 6.3 34.3% 0.0 6.9 37.1% 0.0 Total Liabilities Redeemable preferred stock Common Shareholders' Equity Common stock Capital in excess of stated value Retained earnings Accumulated other comprehensive income 0.0 0.0 27.4 0.0 18.3 45.7 0.0 20.1 40.8 0.0 15.0 7.5 46.2 0.0 21.0 5.6 43.9 11.2 0.0 Total Common Shareholders' Equity Total Liabilities and Shareholders' Equity 65.7% 100.0% 625% 100.0% 2.8 65.6% 100.0% 41.7 114 16.496 6.5% 11.3%