Nike, Inc., is a leading manufacturer and marketer of sport and fashion footwear. Incorporated in 1968 and headquartered in Beaverton, Oregon, its brand name has become almost universal, delivering sales of over $18.5 billion by 2008 and making it the largest seller of athletic footwear and apparel in the world, with operations in 180 countries. Nike's top-selling product categories are running, basketball, and cross-training shoes, but it also markets shoes designed for tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling, cheerleading, skateboarding, hiking, and outdoor activity. Many of its products are sold as leisurewear. In the 1990s Nike was a hot stock, trading at a P/E ratio of 35 and a P/B ratio of 5.1 in mid-1999. By 2008, its P/E ratio had fallen to 16 and its P/B ratio to 3.8, but its stock price actually increased during the bursting of the bubble, from $20 in 2000 to $40 in 2004. We will spend considerable time in the book analyzing and valuing Nike. The Build Your Own Analysis Product (BYOAP) on the Web site tracks Nike from 1996 to 2006. The 2008 financial statements (and comparative 2007 and 2006 statements) that follow introduce you to the firm. You also can find these financial statements in Nike's 10-K report for 2008 on the SEC's EDGAR Web site, which is accessible through the address given in Exercise 2.8, or through link son the book's Web site. Browse the entire 10-K as an example of what a typical l0-K looks like. Look at the footnotes referred to in the statements below. Read the management's discussion of the business and get a sense of the business model. Look also at the firm's Web site at www.nike.com. Examine the financial statements in Exhibit 2.3 and use them to test your basic knowledge of accounting. The questions that follow will help you focus On the pertinent features.

A. Using the numbers in the financial statements, show that the following accounting relations hold in Nike's 2008 statements:

Shareholders' equity' = Assets – Liabilities

Net income = Revenue – Expenses

Cash from operations + Cash from investment + Cash from financing + Effect of exchange rate = Change in cash and cash equivalents

B. What are the components of other comprehensive income for 2008? Show that the following accounting relation holds:

Comprehensive income = Net income + other comprehensive income

C. Calculate the net payout to shareholders in 2008 from the Statement of Shareholders' Equity.

D. Explain how revenue is recognized.

E. Calculate the following for 2008: gross margin, effective tax rate, ebit, ebitda, and the sales growth rate.

F. Explain the difference between basic earnings per share and diluted earnings per share.

G. Explain why some inventory costs are in cost of goods sold and some are in inventory on the balance sheet.

H. Nike spent $2,308 million on advertising and promotion during 2008. Where is this cost included in the financial statements? Does this treatment satisfy the matching principle?

I. Accounts receivable for 2008 of $2,795 million is net of $78.4 million (reported in footnotes). How is this calculation made?

J. Why are deferred income taxes both an asset and a liability?

K. What is "goodwill" and how is it accounted for? Why did it change in 2008 but not in 2007?

L. Why are commitments and contingencies listed on the balance sheet, yet the amount is zero?

M. Explain why there is a difference between net income and cash provided by operations.

N. What items in Nike's balance sheet would you say were close to fair market value?

O. Nike's shares traded at $62 after the 2008 report was filed. Calculate the P/E ratio and the P/B ratio at this price. How do these ratios compare with historical P/E and P/B ratios in Figures and 2.3?