Minicase 2 Nike and Reebok}

Nike and Reebok compete head-to-head in the sport shoe and sport apparel business. For both companies, inventory is a significant portion of total assets. The following information was taken from each company's financial statements and notes to those financial statements.

Other information for Reebok (in thousands):

\section*{Instructions}
Address each of these questions on how these two companies manage inventory:

(a) What problems of inventory management face Nike and Reebok in the international sport apparel industry?

(b) What inventory cost flow assumptions does each company use? Why might Nike use a different approach for U.S. operations than for international operations? What are the implications of their respective cost flow assumptions for their financial statements?

(c) Nike provides more detail regarding the nature of its inventory (e.g., raw materials, work in process, and finished goods) than does Reebok. How might this additional information be useful in evaluating Nike?

(d) Calculate and interpret the inventory turnover ratio and days in inventory for each company. Comment on how the use of different cost flow methods by the two companies affects your ability to compare their ratios.

Transcribed Image Text:

NIKE, INC. Notes to the Financial Statements Inventory. Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for substantially all U.S. inventories. International inventories are valued on a first-in, first-out (FIFO) basis. Inventorics by major classification are as follows (in thousands): May 31 1995 1994 Finished goods $618,521 $465,065 Work in process 9,064 2,915 Raw materials 2,157 2,043 Other information for Nike (in thousands): 1995 1994 Inventory Cost of goods sold $ 629,742 2.865,280 $ 470,023 2,301,423 REEBOK INTERNATIONAL, LTD. Notes to the Financial Statements Inventory. Inventory, substantially all finished goods, is recorded at the lower of cost (first-in, first-out method) or market.