Current Assets, Accounts Receivable, and an Allowance Account
The company’s current assets on the balance sheet include cash and equivalents, short-term investments, net accounts receivable, inventories, prepaid expenses, and other current assets. Nike lists accounts receivable (AR) and an allowance for doubtful accounts in its balance sheet. The AR is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers.
As of May 31, 2022, the firm had AR amounting to $4.667 billion. (Nike, 2022) The high amount implies that Nike has sufficient liquidity or can cover short-term obligations without additional cash flows. The allowance accounts are the estimated losses on accounts receivable resulting from clients’ inability to make the required payments.
During the financial year ending May 31, 2022, and 2021, the allowance for uncollectible accounts receivable was $34 million and $93 million, respectively (Nike, 2022; Nike, 2021). The amount represents 0.72% of accounts receivable, implying that customers are paying down the amount due on sales. Low bad expenses indicate the company is operating optimally, but $34 million in lost income is still a significant loss.
Method Used to Value Inventory
Nike uses the First In, First Out (FIFO) method to value inventory, in which items are sold as they are produced. Wholesale revenues are recorded when ownership and the associated risks and benefits are transferred to the client per the terms of the sale. Depending on the country of purchase and the customer agreement terms, the title is usually assigned at shipment or upon reception by the client (Nike, 2021).
Revenues from retail stores are reported at the point of sale. At the time of purchase, provisions are made for returns and sales reductions. The FIFO inventory valuation technique is appropriate for the firm because it best attracts investors and keeps shareholders happy. Therefore, established brands like Nike, seeking to please shareholders with strong earnings, should use FIFO, which is beneficial in the sportswear industry during inflationary market conditions.
Depreciation Method
The depreciation method is used by businesses to account for reductions in asset values over time. Nike applies the straight-line technique to land improvements, buildings, leasehold developments lasting 2 to 40 years, and machinery and equipment lasting 2 to 15 years (Nike, 2022). The most popular and straightforward approach is the straight-line method. When an asset reaches the end of its useful life, a corporation determines its salvage or scrap value.
Intangible Assets, Long-Term Investment, and Current Liabilities
The company has intangible assets and long-term investments in property, plant, and equipment, totaling $2.926 billion and $4.904 billion, respectively. Identifiable intangible assets consist of indefinite-lived trademarks, acquired trademarks, and other intangible assets (Nike, 2022). Current liabilities on the balance sheet include the current portion of long-term debt, notes payable, accounts payable, the current portion of operating lease liabilities, accrued liabilities, and income tax payable (Nike, 2022). The long-term obligations indicated as notes payable represent the amount of money a business owes its financiers, which include banks and other financial organizations.
Long-Term Debt, Commitments, and Contingencies
Nike had a long-term debt totaling $10.73 billion during the 2022 fiscal year. Additionally, the company has commitments and contingencies in its balance sheet. The company had outstanding bank guarantees and letters of credit totaling $289 million and $275 million, respectively, as of May 31, 2022, and 2021 (Nike, 2022). They were mainly provided for self-insurance plans, real estate contracts, and other standard business obligations (Nike, 2022). Generally, investors are drawn to companies that disclose and acknowledge commitments and contingencies because they can access future cash flows based on anticipated future transactions.
Stockholders’ Equity Account
In Nike’s financial statements, stockholders’ equity, or shareholders’ equity, was $15.281 billion in 2022. The shareholder’s equity section includes Class A and B common stock, capital above stated value, accumulated other comprehensive income or loss, and retained earnings or deficit. The stockholders’ claim of over $15 billion is a significant return after the company has paid its debts.
References
Nike. (2021). 2021 annual report and notice of annual meeting. In Q4cdn (pp. 1–184).
Nike. (2022). Nike Inc. 2022 Annual Report. In Q4cdn (pp. 1–176).