Note to the user: This Word document provides a structured template for preparing your responses to the questions in the annual report project. If you did not purchase the workbook you are not permitted to use this template. INTRODUCTION TO THE CORPORATE ANNUAL REPORT: A Business Application with IFRS Content 3rd edition Copyright 2011 by Applied Accounting Analytics. All rights reserved. Reproduction or translation of this book beyond that permitted by the applicable copyright law without Applied Accounting Analytics’ permission is prohibited.
Requests for permission to reprint or for further information should be directed to bstanko@luc. edu or tzeller@luc. edu. ISBN: 978-0-9841839-2-0 To be completed by the student and submitted with the completed annual report project according to your instructor’s requirements. Complete the following before you submit your assignment. This step is required to validate your compliance with sections 107 or 108 of the 1976 United States Copyright Act. 1. Remove the front cover of the workbook and identify: Student Name: Jackeline S. Gonzalez| Term: | Selected Company: NIKE Inc. Instructor:| 2. Print your completed electronic template. 3. Attach the following: * This page completed with all required information. * Completed Word template. Template boxes expand as you input responses. Adjust page breaks as necessary to submit a professional representation of your work. Chapter 3 – Financial Statements The Balance Sheet Chapter 3: Balance Sheet – Question 1 Identify the date shown at the top of your selected company’s balance sheet. | Current Year| Prior Year| May 31, 2010| May 31, 2009| Does the company’s fiscal year follow the calendar year?
Yes _____ No _X__ If not, why do you think it is different? | Selecting a Non-Calendar (or “Fiscal”) year, however, means that all corporate income and expenses shall be calculated based on the start date and end date that your Board of Directors has designated; (e. g. NIKE Inc. June 1 through May 31 of each year). The selected beginning and ending dates should be selected with a plan toward deferring reported income and payment of taxes: The Short-Year Tax Return: NIKE first taxable year begins on the date of its incorporation and ends on whatever fiscal date its Board of Directors has selected.
Thus, by properly planning corporation’s fiscal year, it is possible to choose a short period for its first taxable year thereby deferring the corporation’s reported income and payment of taxes thereon to a later date. Thus, any tax liability is effectively deferred until the corporation’s following taxable year. Delaying tax on distribution to officers and shareholders because most individuals observe the standard calendar year for purposes of taxation, the tax liability involved with distributions to these individuals can be deferred by properly selecting NIKE fiscal year.
The corporation’s fiscal year is May 31. Benefit to Employees: The tax liability for this bonus is deferred until AFTER the closing of the CALENDAR year (most individuals observe a standard calendar year for purposes of taxation). Thus, the individuals receiving the bonus will not have to report it as income until 11 months later! Benefit to the Corporation: The corporation will benefit because, since its tax year is May 31, the expense from the year-end bonus may be immediately realized in its corporate tax returns thus reducing its tax liability TODAY… instead of 12 months from now. |
Chapter 3: Balance Sheet – Question 2 Review the current asset section of your selected company’s balance sheet. Explain why the order of individual items begins with cash. In your opinion, would it be more or less appropriate to order these items according to dollar magnitude? Explain. | Current assets have a life span of one year or less, meaning they can be converted easily into cash. Such assets classes include cash and cash equivalents, accounts receivable and inventory. Cash, the first and the most fundamental of current assets, also includes non-restricted bank accounts and checks.
Cash equivalents are very safe assets that can be readily converted into cash; NIKE is one such example. Accounts receivables consist of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit; these obligations are held in the current assets account until the clients pay them off. Lastly, inventory represents the raw materials, work-in-progress goods and the company’s finished goods. Depending on the company, the exact makeup of the inventory account will differ.
For example, a manufacturing firm will carry a large amount of raw materials, while a retail firm caries none. The makeup of a retailer’s inventory typically consists of goods purchased from manufacturers and wholesalers. In my opinion balance sheet is in balance where the value of the assets equals the combined value of the liabilities and shareholders’ equity. The assets and liabilities sections of the balance sheet are organized by how current the account is. So for the asset side, the accounts are classified typically from most liquid to least liquid.
For the liabilities side, the accounts are organized from short to long-term borrowings and other obligations. Therefore, can show you with a better idea of the company’s financial condition along with its operational efficiency. This can give investors an idea of how financially stable the company is and how the company finances itself. This activity focus mainly on current accounts to show how well the company manages its operating cycle (which include receivables, inventory and payables). These items can provide insight into the company’s operational efficiency. |
Chapter 3: Balance Sheet – Question 3 Review your company’s balance sheet (or SEC Form 10-K) and compare accumulated depreciation to the historical cost of Plant and Equipment (PE) using the following ratio. | Compute the following:Accumulated depreciation / Plant and Equipment | Percentage of Asset Life RemainingHigh percentage means older assetsLow percentage means newer assets| Is the investment in fixed assets, on average, relatively recent? If not, can we assume that these assets will be replaced shortly? | The investment in fixed assets on less accumulated depreciation.
Property, plant and equipment are recorded at cost. Depreciation for financial reporting purposes is determined on a straight? line basis for buildings and leasehold improvements and for machinery and equipment. Computer software (including, in some cases, the cost of internal labor) is depreciated on a straight? line basis. | Chapter 3: Balance Sheet – Question 4 Since property, plant, and equipment (PPE) and long-term investments in stock represent a company’s investment, why do we distinguish between them in the balance sheet? |
On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term. Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet. For the liabilities side, the accounts are organized from short to long-term borrowings and other obligations. Your debts that are not due until more than a year from the balance sheet date are generally classified as long-term liabilities. Chapter 3: Balance Sheet – Question 5 Review the noncurrent asset section of your company’s balance sheet. Are any intangible assets listed? If so, identify the types of intangible assets and the percent of total assets that the intangible assets represent. (In Millions, Except per share Data)| Intangible Asset 1: 1,931. 9| Intangible Asset 2: 467. 0| Intangible Asset 3: 187. 6| Total Intangible Assets Total Assets = 17%| If this company were to be acquired by another company, would the intangible assets influence the purchase price?
Explain your answer. | The Company completed its acquisition of 100% of the outstanding shares based on global brands. This acquisition is intended to strengthen the company’s market position and expand NIKE’s global leardership, a key area of growth company. The acquisition was accounted for as a purchase business combination. The remaining purchase price is being recorded as googwill. Indentifiable intangible assets include millions for trademarks that have an indefinite life conssting in sourcing network, established customer relationship, and franchise.
These intangible assets are amortized on a straight-line basis over estimated lives of 12 to 20, which lead the company to remain competitive purchase price on the market. We also can’t forget about the logo and sponsors impact. | Chapter 3: Balance Sheet – Question 6 Now review your company’s total assets for the most recent year. What percentage of total assets is current? Noncurrent? | Current| Noncurrent| 10,959. 2/14,419. 3 = 0. 76 x 100= 76%| 3,460. 1/14419. 3=0. 23×100=24%| Should companies have a greater investment in current assets or noncurrent assets, or does it depend on the nature of their business?
Explain your answer. | It depends on their liquidity needs. If their goal is growth, then more of their assets should be current. That way they have higher potential purchasing power if an opportunity arises. If they are trying to simply maintain market share, then a greater percentage could be in longer-term investments. | Chapter 3: Balance Sheet – Question 7 Review your company’s balance sheet. Does it report a deferred tax asset? A deferred tax liability? If so, are the deferred tax assets and/or liabilities reported as current or noncurrent? | Deferred tax asset? Yes or No| Current or Noncurrent*|
Deferred tax liability? Yes or No| Current or Noncurrent*| Chapter 3: Balance Sheet – Question 8 Identify the information that relates to the stockholders’ equity section of your company’s balance sheet. (In Millions, Except per share Data)| Par value per share of common stock? | 485. 5| Number of common shares authorized? | 8. 4| Number of common shares issued? | 3. 93| Number of common shares outstanding? | 493. 9| Number of treasury shares held by the company? | 3. 86| Chapter 3: Balance Sheet – Question 9Answer the following questions relative to the stockholders’ equity section of the balance sheet. In Millions, Except per share Data)| By what amount did retained earnings increase or decrease from the prior year? | 6,44. 1 4. 4%| Was the increase or decrease in retained earnings equal to the company’s current year net income or net loss? | Yes | * If No, then dividends were paid (or declared) by your selected company or certain events took place during the year where the accounting for the events directly affected the retained earnings account. | Chapter 3: Balance Sheet – Question 10List (write-in) each financial statement element as shown in your company’s balance sheet. Assets| Liabilities| Stockholders’ Equity| Cash and equivalents| Current long term debt| Common stock at stated value| Short term investments| Notes payable| Class A | Accounts receivable| Accounts payable| Class B| Inventory| Accrued liabilities| Capital in excess of stated value| Deferred Income taxes| Income taxes payable| Accumulated other comprehensive income| Prepaid Expenses| Long term debt| Retained earnings| PPE| Deferred income taxes and others liabilities| | Identifiable intangible assets| Commitments and contingencies| | Goodwill| Redeemable Preferred stock| | Deferred Income taxes and other assets| | |
Chapter 3: Balance Sheet – Question 11 Identify the combined carrying values (dollar amounts) of the following selected account groups taken from your company’s balance sheet:(In Millions, Except per share Data)| Account Groups| Current Year| Prior Year| Increase or Decrease(in dollars)| Current Assets | 10,959. 2| 9,734. 0| 1,225. 2| Net Fixed Assets| 1931. 9| 1957. 7| -25. 7| Intangible and Other Noncurrent Assets| 467. 0| 467. 4| -. 4| Current Liabilities | 3,364. 2| 3,277. 0| 87. 2| Long-term Liabilities| 445. 8| 437. 2| 8. 6| Common Stock| 493. 9| 490. 7| 3. 2| Additional Paid in Capital*| 3,440. | 2,871. 4| 569. 2| Retained Earnings| 6,095. 5| 5,451. 4| 644. 1| Other Equity Components| 855. 3| 842. 0| 13. 3| Chapter 3: Balance Sheet – Question 12 Identify the three major balance sheet accounts, for example accounts receivable, accounts payable, inventory, etc. that changed the most from the prior year. What events might explain these changes? Working to explain why these changes occurred contributes to a greater understanding about a company. | Account| Explanation| Common Stock| In fiscal 2010, NIKE purchased 11. 3 million shares of NIKE’s Class B common stock for $754 million.
During fiscal 2010, was concluded our previous four year, $3 billion share repurchase program that was approved by the Board of Directors in June 2006. During this program, NIKE repurchased a total of 53. 9 million shares. Having completed the program, during the third quarter of fiscal 2010, were began repurchases under the four? year $5 billion program approved by our Board of Directors in September 2008. | Income Tax| Our year? over? year effective tax rate improvement was driven by continued benefit from our international businesses, which are generally taxed at rates lower than the U.
S. statutory rate| Net purchase| The year over year increase was primarily due to net purchases of short -term investments of $0. 9 billion (net of sales and maturities) in fiscal 2010. | Cash | Cash used by investing activities was $1. 3 billion during fiscal 2010. Also contributing to the year over year increase in cash used by investing activities in fiscal 2010 which was a reduction in proceeds for the settlement of net investment hedges; these increases were partially offset by a reduction in cash used for purchases of property, plant and equipment|
Chapter 3: Balance Sheet – Question 13 Prepare a common-sized balance sheet (expressed in percentages) using the following account groups shown in your selected company’s balance sheet. | Account Group| Current Year| Prior Year| Increase or Decrease(current year percent minus prior year percent)| Current Assets| 76%| 74%| 2%| Net Fixed Assets| 13%| 15%| -2%| Intangible and Other Noncurrent Assets | 11%| 11%| | Total Assets| 100%| 100%| | Current Liabilities| 23%| 25%| -2%| Long-term Liabilities| 3%| 3%| | Common Stock| 24%| 22%| 2%| Additional Paid in Capital| 2%| 3%| -1%| Retained Earnings| 42%| 41%| 1%|
Other Equity Components| 6%| 6%| | Total Liabilities and Stockholders’ Equity| 100%| 100%| | Chapter 3: Balance Sheet – Question 14Identify the three balance sheet groups from question 13 above that changed most significantly. Within each of these groups, identify the primary balance sheet element that drove this change. What events might explain these changes? | Group Name:Current Assets| Explanation:(Example – sales increased by 22%, thus accounts receivable increased by approximately 22%)| Additional paid in capital| Additional Paid in capital for our worldwide NIKE Brand footwear business were down 1% compared to the prior year.
All of geographies delivered lower revenues with the exception of Emerging Markets, reflecting a challenging economic environment across most markets, most notably in our Western Europe and Central and Eastern Europe geographies| Current Assets| Current assets in orders increased 2% when translated at forecasted exchange rates for the next six months, which approximate current spot rates. The reported futures and advance orders growth is not necessarily indicative of our expectation of revenue growth during this period. This is due to year? over? ear changes in shipment timing, and because the mix of orders can shift between advance/futures and at? once orders and that the fulfillment of certain orders may fall outside of the schedule. | Current liabilities| Market conditions result in reductions in the estimated current liabilities realizable value of the inventory below the previous estimate year. | Chapter 3: Balance Sheet – Question 15 Did your company become more or less liquid when comparing this year to last year? (In Millions, Except per share Data)| Current Year:Current Assets minus Current Liabilities =10,959. -3,364. 2= 7,595| Prior Year:Current Assets minus Current Liabilities =9,734. 0-3,277. 0= 6,457. 0| Explain why? | The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business, that are enforceable and legally binding and that specify all significant terms. In some cases, prices are subject to change throughout the production process. Other amounts primarily include service and marketing commitments made in the ordinary course of business.
The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, including open purchase orders for non? product purchases. NIKE also has the following outstanding short? term debt obligations as of May 31, 2010. In my opinion the more liquid an asset it is the faster it will sale on the market. Whether an asset is liquid depends on the time frame you consider. I will say is more liquid. | Chapter 3: Balance Sheet – Question 16Did your company increase or decrease its financial leverage when comparing total debt to total stockholders’ equity from this year to last? Current Year:Total debt Total stockholders’ equity =3,364. 2/9,753. 1= . 34 = 34%| Prior Year: Total debt Total stockholders’ equity =3,277. 0/8,693. 1=. 38 = 38%| Explain why:| During fiscal 2010, was concluded our previous four year, $3 billion share repurchase program that was approved by the Board of Directors in June 2006. During this program, NIKE repurchased a total of 53. 9 million shares. Having completed the program, during the third quarter of fiscal 2010, were began repurchases under the four? ear $5 billion program approved by our Board of Directors in September 2008. The company continue to expect funding of share repurchases will come from operating cash flow, excess cash, and/or debt. The timing and the amount of shares purchased will be dictated by our capital needs and stock market conditions. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. In my opinion the company decrease is debts.
If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. | The Income Statement or Statement of Earnings
Chapter 3: Income Statement – Question 1 Review the heading of your company’s income statement. Does the company’s income statement provide two or three years of comparative information? (Insert number to the right. )| _3_ yrs. | Why do you think the SEC requires that balance sheets provide two years of comparative financial information and income statements provide three years of comparative financial information? | Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.
A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of the reporting period. It does not show the flows into and out of the accounts during the period. Therefore income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses.
This tells you how much the company earned or lost over the period. | Chapter 3: Income Statement – Question 2Review the middle section of your company’s income statement. Did operating income (loss) increase or decrease from the prior year and by how much? You may have to compute operating income (loss). (In Millions, Except per share Data)| Increased by $ 19. 2| Decreased by $ | Chapter 3: Income Statement – Question 3Does the middle section of your company’s income statement show a nonoperating income (loss) increase or decrease from the prior year and by how much?
You may have to compute nonoperating income (loss). (In Millions, Except per share Data)| Increased by $ | Decreased by $ 42. 5| Chapter 3: Income Statement – Question 4In reference to why you are studying this company, is it important to know the different sources of income—operating or nonoperating? | Because operating earnings are really the only guides for future events. The company cannot continually generate income from nonoperation sources. You can only sell off so many divisions or have only so many one off events. |
Chapter 3: Income Statement – Question 5If any of the irregular events are shown on your company’s income statement, describe the nature and the amount. Select the most current year affected by the event if multiple years are affected. (In Millions, Except per share Data)| Irregular Event| Amount| Nature of the Change| Restructuring charge? | 195. 0| 2009| Discontinued operation? | -| -| Extraordinary event? | -| -| Chapter 3: Income Statement – Question 6Review the lower section of your selected company’s income statement.
Did net income (loss) increase or decrease from the prior year and by how much? (In Millions, Except per share Data)| Increased by $ 420| Decreased by $ | Chapter 3: Income Statement – Question 7 Prepare a common-sized income statement for the categories below. | Account/Category| Current Year| Prior Year| Increase or Decrease(current year percent minus prior year percent)| Net Sales (revenues)| 100%| 100%| | Cost of Goods/Services (if applicable)| 54%| 55%| -1%| Gross Profit | 46%| 45%| 1%| Operating Expenses | 33%| 32%| 1%| Operating Income (Loss)| 13%| 13%| |
Nonoperating Income (Loss)| 10%| . 5%| 9. 5%| Income Tax Expense| 3%| 3%| | Net Income| 10%| 8%| 2%| Chapter 3: Income Statement – Question 8 Identify the three income statement accounts/categories that changed the most in Question 7. What events might explain these changes? | Account or Category:| Explanation:| Net Income| The increase of 2% is primarily driven by an improved gross margin percentage and a reduction in the company tax rate, which more than offset the reduction in revenues and higher selling and administrative expenses. Gross Profit (margin)| The increase in gross margin percentage was primarily the results of favorable product mix, cost reduction, initiatives, lower input cost and sales growth on NIKE owned retail business. | Nonoperating Income| NIKE year over year effective tax rate improvement was driven by continued benefit from the international business, which are generally taxed at rates lower. | Chapter 3: Income Statement – Question 9Identify your company’s Basic and Diluted EPS amounts. Place a N/A in Diluted EPS if not reported. (In Millions, Except per share Data)| | Basic EPS | Diluted EPS|
Current year| 3. 93| 3. 86| Preceding year 1| 3. 07| 3. 03| Preceding year 2 | 3. 80| 3. 74| Why is diluted EPS always equal to or less than basic EPS? | EPS is earnings divided by shares. Basic EPS uses the shares actually issued – i. e. , current shares. Diluted EPS uses the shares that could potentially be issued if you count current shares, plus stock options, warrants, convertibles, and other potential sources of dilution that were currently exercisable were invoked. Diluted shares will always be a larger number than current shares, or equal if none of these things exists. | Statement of Cash Flows (SCF)
Chapter 3: SCF – Question 1 Is the SCF dated in the title for a period of time similar to the income statement or for a point in time similar to the balance sheet? Why? | In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business.
The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. | Chapter 3: SCF – Question 2 Identify the following sections of the SCF and record the amounts. Check the math by summing to the cash balance at end of year. Verify that the ending cash balance reported on the SCF is the same as reported on the balance sheet. (In Millions, Except per share Data)| Section| Current Year| Prior Year| Second Prior Year|
Net operating cash flows| 1,906. 7| 1,486. 7| 1,883. 4| Net investing cash flows| 1,267. 5| 798. 1| 489. 8| Net financing cash flows| 1,061. 2| 733. 9| 1,226. 1| Net increase (decrease) in cash flows| 788. 0| 157. 2| 277. 2| Cash balance at beginning of year| 2,291. 1| 2,133. 9| 1,856. 7| Cash balance at end of year| 3,079. 1| 2,291. 1| 2,133. 9| Does the total match balance sheet cash? | Yes | Yes | | Chapter 3: SCF – Question 3 Record net sales, net income and net operating cash flows below. All three should be trending in approximately the same direction. If so, this is a sign of a well-run business.
If one or more are going in a different direction, or random, then you must keep an eye open for an explanation why. (In Millions, Except per share Data)| Item| Current Year| Prior Year| Second Prior Year| Net Sales | 10,213. 6| 10,571. 7| 10,239. 6| Net Income| 1,906. 7| 1,486. 7| 1,883. 4| Net Operating Cash Flows| 3,164. 2| 1,736. 1| 1,936. 3| Explain. (Hint: Look at depreciation expense and substantial changes in inventory, accounts receivable and accounts payable balances. Explaining why is a key learning point. )| There are two differences between Net Income and Cash Flow that should be noted.
The first is the accounting for the consumption of capital goods. The Net Income measure uses depreciation, while the Cash Flow measure uses last period’s net capital purchases. The second difference is that the Free Cash Flow measurement deducts increases in net working capital, where the net income approach does not. Cash flow is not the same as net income. Cash flow will not match the amount of net income shown on your profit and loss Income statement. This is because net income includes noncash items, such as depreciation. And also because net sales are Sales not cash payments.
It is necessary to reconcile net income reported on the Income statement to net cash flow from operations on the cash flow statement. This is the same as using the indirect method to compute cash flow from operating activities. Any depreciation and amortization amounts shown on the Income statement are added to net income. This is because a depreciation or amortization allowance has no cash component. | Chapter 3: SCF – Question 4 Identify the primary cash outflows and inflows from investing activities. (In Millions, Except per share Data)| Description of Activity| Amount|
Cash outflow:| 1,267. 5| Cash inflow:| 3,164. 2| Consider three key issues at this point. Is the company adding assets? This is a sign of growth. Is the company replacing assets? This is a sign of growth and stability. Is the company only selling assets? This is a sign of retrenchment. | It demonstrates the power of our growth strategy, which is to replace assets to create innovative products, amazing brand experiences, and premium retail destinations wherever consumers connect with NIKE. The company continues to maximize the flexibility, balance and alignment that it has built into the ortfolio of brands and categories. Those strengths will help navigate the continued uncertainty in the macro-economic picture. More importantly they help leverage the global appetite for sports and innovation, which has never been stronger. That’s how Nike continues to grow businesses, strengthen his balance sheet and increase the company returns to shareholders over the long term. | Chapter 3: SCF – Question 5Identify the primary cash inflow and outflow from financing activities. | Description of Activity| Amount| Cash inflow:| 3,079. 1| Cash outflow: (Note: cash dividends paid are reported here. | 1,061. 2| Consider two key issues at this point. How is the company being financed, through debt or equity? Can you determine which is growing faster and why? A sound corporate strategy is to finance a company with debt during stable times, because this demands regular payment of principal and interest, and to finance a company with equity during unstable times, because leadership can elect to pay or not pay dividends. | Nike company is being financed through debts. This company strategy is primary base on debt; is generally cheaper to issue and has a lower capital cost than equity.
Also its take a smaller bite on bond issues than on equity offerings; it’s also much easier to market debt than equity (as bonds have more guarantees than stocks, which generally have almost none). The bond market is many times larger (in asset ; market value) than the stock exchanges. Also, issuing debt is regarded as a better “signal” to investors (because it implies management’s confidence in the firm) than issuing more equity. Issuing more equity can also dilute investors’ original stakes and is therefore unpopular with shareholders. | The Statement of Stockholders’ Equity (SSE)
Chapter 3: SSE – Question 1 Identify the elements that comprise the statement of stockholders’ equity section of your company. Hint: These items are generally illustrated across the top of the page using a columnar format. (Example. Common stock – shares and dollar amount. )| The elements for NIKE company that comprise the statement of stockholders’ equity are Capital in Excess of stated value, Accumulated other comprehensive income, retained earnings and the common stock. | Chapter 3: SSE – Question 2 (In Millions, Except per share Data)| Identify the cash dividends per share. | $1. 06| Determine the dividend payout percentage.
A company’s dividend payout percentage is computed by dividing dividend per common share by net income or earnings per common share. (Hint: If your company reported a net loss for the year, the answer lacks meaning. ) | 1. 24% Dividend rate| Compute dividend yield. A company’s dividend yield is computed by dividing dividend per common share by market price per common share. (Hint: Use the current per share price for your selected company. )| 1. 40%| Is your company’s dividend yield a reasonable return given current market conditions? | The shareholders approved, the NIKE Inc. 1990 Stock Incentive Plan.
The committee has granted substantially all stock options at 100% of the market price on the date of the grant. Substantially all stock options grants outstanding under the 1990 Plan were granted in the first quarter of each fiscal year, vest ratably over four years, and expire 10 years from the date of grant. Also the price for non-statutory stock options and stock appreciation rights may not less 100% of the fair market value of the underlying shares on the date of the grant. | Notes to the Financial Statements Chapter 3: Notes to the Financial Statements – Question 1 How does your company define “cash and cash equivalents”? Cash is define as an item on the balance sheet that reports the value of a company’s assets that are cash or can be converted into cash immediately. Highly liquid, very safe investments which can be easily converted into cash, such as Treasury Bills and money market funds. In the other hand cash equivalents are define as an asset such as property or stock that has a realizable cash value equivalent to a specific sum of money. Also mentioned as an asset that is so easily and quickly convertible to cash that holding it is essentially equivalent to holding cash. (i. e A Treasury bill is a cash equivalent. )|
Chapter 3: Notes to the Financial Statements – Question 2 How does your company value its “inventories”? Explain the meaning of the inventory valuation method. Are domestic and international inventories valued the same? Service companies will typically not have inventory. | NIKE company values its inventory as the cost of goods sold amount, which in turn affects gross profit (margin), net income before taxes, taxes owed, and ultimately net income. It is clear, then, NIKE inventory valuation approach can cause a ripple effect throughout its financial picture. One may think that inventory valuation is relatively simple.
For a retailer, inventory should be valued for what it cost to acquire that inventory. When an inventory item is sold, the inventory account should be reduced (credited) and cost of goods sold should be increased (debited) for the amount paid for each inventory item. An inventory valuation method is| Chapter 3: Notes to the Financial Statements – Question 3Does your company report any investments in marketable securities? Identify the respective amount(s) invested. (In Millions, Except per share Data)| Category| Current Year Amount| Trading Securities| | Available-for-Sale Securities| 2,066. | Held-to-Maturity Debt Securities| The company did not hold any short-term investments that were classified as held to maturity debt. | Chapter 3: Notes to the Financial Statements – Question 4 Note 1 and a separate note on income taxes should provide the information to answer this question. (In Millions, Except per share Data)| What was your company’s income tax expense for the current year? | 610. 2| How much cash was paid for income taxes in the current year? (Hint: Review the SCF. The difference generally relates to the accrual basis of accounting. ) | 537. 2|
Identify the three major elements, such as depreciation or other post employment benefits, that gave rise to deferred tax assets or deferred tax liabilities:| Deferred Tax Assets| Deferred Tax Liabilities| Undistributed earnings or foreign subsidiaries| Intangibles Assets| Foreign tax credit carry-forwards| Tax benefits associated with impairment of goodwill| Stock-based compensation| Retroactive reinstatement of the research and development tax credit| What is this year’s effective tax rate for your company? What is the current year statutory rate? | Effective Tax Rate: 24. 2 %Statutory Tax Rate: 35. 0 %|
Chapter 3: Notes to the Financial Statements – Question 5 Reviewing note #1, any related supporting notes, and/or the 10-K, identify the fixed asset group(s), depreciation methods used, and the estimated useful lives of these fixed assets. | Fixed Asset Group| Depreciation Method| Estimated Lives (range)| N/A| N/A| N/A| N/A| N/A| N/A| N/A| N/A| N/A| N/A| N/A| N/A| N/A| N/A| N/A| Chapter 3: Notes to the Financial Statements – Question 6 Review the balance sheet, note #1, and any related notes and identify the amount of goodwill reported in the current year. (In Millions, Except per share Data)| Amount reported in current year. $ 187. 6| Identify the amount of any significant write-down of goodwill that occurred during the current year. | $ 319. 2| How does management describe how it accounts for goodwill as disclosed in the note(s) to the financial statements? | The company performs annual impairments test on goodwill and intangibles assets with indefinite lives in the fourth quarter of each fiscal year, or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value.
The impairment test requires the company to estimate the fair value of its reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill is potentially impaired, then the company measures and record an impairments loss equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value should such a circumstance arise. Therefore on note 4 Nike company recorded the goodwill base on the remaining purchase price.
The purchase price was allocated to tangible and identifiable intangible assets acquired on their respective estimated values on the date of acquisition of Umbro, a leading United Kingdom based global soccer brand. | Chapter 3: Notes to the Financial Statements – Question 7 Given present executive compensation packages, why would the user of financial information prefer a company follow SFAS #123(R) instead of APBO #25? Explain. |
FASB issued Financial Accounting Standard 123 (SFAS 123), encouraging, but not requiring, companies to adopt a fair value-pricing model to measure and recognize the option value at the grant date and record a portion of this amount as annual expense over the vesting period of the option. Companies that continued using the requirements of APBO 25 had to disclose the pro forma impact of the fair value method on their annual earnings and earnings per share (EPS). SFAS 123, however, did not require the quarterly calculation and disclosure of the option expense.
In addition, SFAS 123 did not address the financial impact of options during the period from the vesting date to the exercise date. By allowing the use of competing accounting methods and by not considering the total cash flow impact on sponsoring entities, FASB missed an opportunity to deliver on its stated goal of providing neutral accounting information to assist users in assessing cash flows. | Chapter 3: Notes to the Financial Statements – Question 8 Review your company’s lease note (and related balance sheet information), then identify the following amounts:(In millions)| Minimum lease payments under operating leases| 583. | Minimum lease payments under capital leases| 132. 0| Ratio of operating lease payments to capital lease payments| 3,508. 0| As a user of reported financial information, would you be concerned about a significant amount of operating leases that are not reported in the balance sheet? Explain. | There are two ways of accounting for leases. In an operating lease, the lessor (or owner) transfers only the right to use the property to the lessee. At the end of the lease period, the lessee returns the property to the lessor.
Since the lessee does not assume the risk of ownership, the lease expense is treated as an operating expense in the income statement and the lease does not affect the balance sheet. In a capital lease, the lessee assumes some of the risks of ownership and enjoys some of the benefits. Consequently, the lease, when signed, is recognized both as an asset and as a liability (for the lease payments) on the balance sheet. The firm gets to claim depreciation each year on the asset and also deducts the interest expense component of the lease payment each year.
In general, capital leases recognize expenses sooner than equivalent operating leases. | Chapter 3: Notes to the Financial Statements – Question 9 Review your company’s long-term debt note and identify the following (consider the three most significant liabilities only):In Millions| Instrument| Maturity Date| Rate| Amount Due| Corporate bond| July 23,2012| 5. 66%| 27. 0| Corporate Bond| October 15, 2015| 5. 15%| 112. 4| Japanese Yen note| August 20,2001 through November 20, 2020| 2. 6%| 53. 1| How much interest expense was recognized in the current year? | 0. 3% to 1. %| How much cash was paid for interest in the current year? (Hint: Look in the SCF. *)| 537. 2| *The difference between interest expense and cash paid for interest is due to the accrual basis of accounting (and in some cases, the capitalization of interest). | Chapter 3: Notes to the Financial Statements – Question 10 Review your company’s pension and OPEB note (if applicable) and answer the following questions. | | Pensions| OPEB| How much is the Projected Benefit Obligation (PBO) and Accumulated Postretirement Benefit Obligation (APBO) for your company at the end of the current year? The company has a profit sharing plan available to most US employees. The terms of the plan call for annual contributions by the company as determined by the Board of Directors. A subsidiary of the company also has profit sharing plan available to its employee. Contributions of 34. 9million were made to the plan and are included in selling and administrative expenses for the years ended May 31, 2010. The company matches a portion of employee contributions with common stock or cash. Company contributions to the saving plan was 34. 2 million ended on May 31, 2010 and it was included in selling and administrative expenses.
The liability related to the unfunded pension liabilities of the plan was 113. 0 million. The company also has the Long Term Incentive Plan LTIP that recognized 24. 1 of selling and administrative expenses related to cash awards under the LTIP. | What was the amount of pension or OPEB benefits paid to plan participants during the current year? | | What amount of cash did the company contribute to the respective funds during the current year? This is known as “employer contributions. ”| | What is the value of the plan assets at the end of the current year? | |
Based on your review of the plan assets and the projected benefit obligation (or accumulated postretirement benefit obligation), has your company sufficiently funded its employee benefit plans (this is known as funded status)? | The company has pension plans in various countries worldwide. The pension plans are only available to local employees and are generally government mandated. | An expected average return on invested plan assets is used to reduce the volatility in the reporting of pension or OPEB expense. Higher expected average returns reduce pension or OPEB expense, and lower expected returns increase pension expense.
What rate of return on plan assets does your company use to compute pension or OPEB expense? Does this appear reasonable, given present market conditions? | Rate employed? Deductions Up to 10%| Response: Yes, because the company estimates the expected volatility based on the implied volatility in market traded options on the company common stock with a term greater than one year. | Chapter 3: Notes to the Financial Statements – Question 11 Based on your review of the contingencies note, briefly identify specific events that have led to the accrual of contingent liabilities in your selected company’s the balance sheet. The company provides routine indemnifications relating to the enforceability of intellectual property rights, coverage for legal issues that arise and others items that the company is acting as the guarantor. | The company is involved in various legal proceedings involving contractual and employment relationships, product liabilities claims, trademarks rights, and a variety of others matters. | | Chapter 3: Notes to the Financial Statements – Question 12 Based on your review of the segment-reporting note to the financials, identify the reported operating segments, their related revenues, and operating income.
Identify the largest three if more than three are disclosed. In millions| Reportable Operating Segments| Net Sales Revenue| Net Operating Income| Geographic Regions| 19,014. 0| | Inventories| 2,040. 8| | PPE| 1,931. 9| | Chapter 3: Notes to the Financial Statements – Question 13 Based on your review of the segment-reporting note to the financials, identify the geographical segments and their related revenues. Identify the largest three if more than three are disclosed. In millions| Country| Net Sales Revenue| North America| 6,696. 0| Western Europe| 3,892. 0|
China| 1,741. 8| Chapter 3: Notes to the Financial Statements—Question 14 Based on your review of the notes to the financials or the statement of stockholders’ equity, identify the components (no more than four) that comprise Other Comprehensive Income for your company. In millions| Component| Amount| Stock Options based on accelerated stock expenses recorded for employees eligible for accelerated stock options vesting upon retirement| 134. 6| ESPPs| 13. 7| Restricted Stock| 10. 7| Restructuring Accrual (Accrued Liabilities)| 8. 2| Chapter 4 – Financial Analysis
Summary Financial Analysis Report Profit Margin %| Answers how well the business performed. | Company Two Years Prior| Company One Year Prior| Company| Industry| S&P 500| Gross Margin| Gross Profit /Total Revenue| 45. 0| 44. 9| 46. 5| 51. 8| 39. 3| Pre-Tax Margin| Operating Income / Total Revenue| 13. 4| 10. 2| 13. 4| 18. 2| 16. 7| Net Profit Margin| Net Income /Total Revenue| *10. 1| *7. 8| 10. 1| 12. 7| 12. 1| Sales| Financial Statement| 1. 85| 1. 46| 1. 88| Not required| Not required| Operating Income| Financial Statement| 2,502. | 1,956. 5| 2,516. 9| Not required| Not required| Operating Cash Flows| Financial Statement| 3,164. 2| 1,736. 1| 1,936. 3| Not required| Not required| Evaluate Profitability (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find increasing performance, above or below industry average. For a company with a stability strategic focus you will likely find stable performance, above or below industry average.
For a company in a retrenchment strategic focus you will likely find poor performance, below industry average with efforts to improve and approach industry average. Note: Sales, operating income and operating cash flows should trend in approximately the same direction. This signals a stable operating business environment. If the three measures are not trending together, this signals lack of control by management. ) | The Nike company provides A strategy based on investing in companies and sector which are growing faster than their peers. The benefits are usually in the form of capital gains rather than dividends.
Also, the company develops a Strategy of the strengthening of company positions within the market. This strategy means that the enterprise does everything to win best positions for certain product within certain market. For realization of this strategy the massive marketing efforts are required. Besides this strategy often supposes the “horizontal integration” which means that company aims to establish the control over the competitors. Therefore the company utilizes strategy of the product development, which solves a problem of growth by creating of new product and selling it on already mastered market. Financial Condition | Signals ability to take on additional debt and liquidity. | Company Two Years Prior| Company One Year Prior| Company | Industry| S&P 500| Debt/ Equity Ratio| (Total Liabilities – Current Liabilities)/ Total equity| *. 08| *. 09| . 06| . 08| 1. 07| Current Ratio| Current assets /Current liabilities| 2. 7| 3. 0| 3. 4| 3. 2| 1. 4| Quick Ratio| (Cash and Short Term Investments + Short Term Investments + Total Receivables, Net) / Current Liabilities| 1. 9| 2. 3| 2. 6| 2. 3| 1. 0| Interest Coverage| Data not readily available| *61. | *48. 5| 648. 7| 443. 1| 38. 3| Evaluate Financial Condition (often labeled liquidity and solvency analysis) (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find stable or slightly decreasing liquidity, above or below industry average. Debt to equity often is increasing in a growing company. For a company with a stability strategic focus you will likely find stable liquidity, above or below industry average.
Debt to equity often is stable as well. For a company with a retrenchment strategic focus you will likely find poor liquidity, below industry average with efforts to improve and approach industry liquidity. Debt to equity often is decreasing in a company during retrenchment. )| The Nike company is part of the growth strategy focus, which is used to determine the company’s ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
Therefore Nike shows consistence and stability on the market business. The company posses the ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. | Investment Return %| Signals performance for managers and owners. | Company Two Years Prior| Company One Year Prior| Company | Industry| S;P 500| Return On Equity| Net Income /Total Equity| *24. 1| *17. 1| 20. 8| 26. 6| 25. 2| Return On Assets| Net Income /Total Assets| *15. 1| *11. 2| 14. 3| 17. 6| 8. 0| Return On Equity (5-Year Avg. )| | Not required| Not required| 21. | 24. 6| 16. 3| Return On Assets (5-Year Avg. )| | Not required| Not required| 14. 1| 16. 8| 7. 8| Evaluate Investment Return (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find increasing returns. For a company with a stability strategic focus you will likely find stable investment returns. For a company in a retrenchment strategic focus you will likely find poor and stable investment solvency, below industry average. )|
All businesses and financial institutions need to define increasing returns in order to estimate the success of a given project or strategy. The concept of increasing returns does not only incorporate growth in returns, but it also requires the overall growth rate to increase. For example, if NIKE company experiences 8 percent growth rate in its profits during two consecutive years, the company is said to experiences constant returns. A lower than 8 percent growth for the year would imply diminishing returns, and a higher growth rate compared to 8 percent would mean the company experienced increasing returns in its profits.
A company can experience increasing returns even when costs are increasing, but the proportionate increase in the profits should be higher than the increase in costs. Therefore, increasing returns are defined in percentage terms instead of absolute terms. | Management Efficiency| Signals how well the company was run by management. | Company Two Years Prior| Company One Year Prior| Company | Industry| S;P 500| Income/Employee| | Not required| Not required| 56,765| 110,669| 103,280| Revenue/Employee| | Not required| Not required| 563,677| 699,275| 929,573| Receivable Turnover| Total Revenue /Average Accounts Receivable – Trade, Net | 7. | 6. 4| 6. 9| 13. 0| 17. 1| | Average is defined: (beginning of the year + end of the year) / 2| Inventory Turnover| Cost of Revenue, Total / Average Total Inventory | 7. 6| 8. 13| 4. 6| 3. 8| 10. 7| Asset Turnover| Total Revenue / Average Total Assets| 1. 5| 1. 4| 1. 4| 1. 4| . 8| Evaluate Management Efficiency (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focuses you will likely find improving efficiency, above or below industry average.
For a company with a stability strategic focus you will likely find stable efficiency, above or below industry average. For a company in a retrenchment strategic focus you will likely find poor efficiency, below industry average with efforts to improve and approach industry average. )| Strategic objectives are used to focus Nike goals by using methods designed for organizations to foster growth and success. Strategic objectives for Nike focus on efficiency are the most successful return investment for the business.
The measuring concepts used empower business executives and staff to incorporate the company goals into alignment with the overall objectives of the company or organization. Programs are further developed to guide managers and staff by way of certain tasks that facilitate management effectiveness. The benefits of employing goals that incorporate strategic objectives include ways to use project management for the best team leadership and communication within an organization. Therefore this strategy put Nike above the industry average. Chapter 5 – Decision-Making Process Chapter 5: Decision-making Process – Question 1Based upon your review, do the numbers support the company’s explicit strategic focus: a growth, stability or retrenchment focus? Why or why not? | Strategy on growth and stability is the primary focus on Nike company. It’s overseas, in fact, where most of Nike’s sales now come from. During all this years Nike posses consistency on business leading the sport trademark. International sales exceeded U. S. sales still the company’s single largest market.
Under Grossman, Nike is making sports fashion a core business, something unthinkable until recently inside Nike’s male-dominated culture. Thanks to stylish athletic wear — think tennis star Serena Williams at the U. S. Open Nike’s worldwide apparel sales climbed 30% in three years, to $3. 5 billion in fiscal 2004. Nike has also shown it can grow by expanding into new markets. When the U. S. hosted the World Cup Nike’s global soccer sales were $45 million. But a team of executives persuaded Knight that soccer was the company’s future.
Today, soccer sales are nearly $1 billion, or 25% of the global market. This year, for the first time, Nike’s share of the soccer shoe markets in Europe, 35%, and some many examples on the sport industries. | Chapter 5: Decision-making Process – Question 2Return to the first question in this project. Chapter 1: Identify Why You Selected This Company—Question 1 A) What is/are your motivation(s) or interest(s) in selecting this company? B) What question(s) are you seeking to answer? You were asked to explain why you were investigating this company’s annual report.
You have likely uncovered numerous pieces of information, some with conflicting insight. This may involve both financial and nonfinancial information. In addition, you may have found certain information to be incomplete for decision-making purposes. This is real world analysis. Most business decisions are made with as much reliable information as possible, yet common to the decision-maker is a desire for more information. Prepare a thorough, yet concise answer to your original questions A and B above. For example, would you work for this company, why or why not?
Support your response with the information gathered throughout your annual report study. | Basically I still in fact fascinated about Nike business and decision making on the market industry. For me NIKE is o longer the brat of sports marketing, it has a higher level of discipline and performance. The most important part of Nike strategy is being part of the community and recorded memories thru the successful of the people. The company expanded Considered Design ethos by launching an open source community for patents and intellectual properties. Integrated the community potential in to the company.
The company sells a lot of shoes and clothes, but ultimately they’re in the business of human potential. Their job is to bring inspiration and innovation to every athlete in the world. They are in the mission of follow the message from his co-founder Bill Bowerman said, if you have a body, you’re an athlete. Nike wants to create potential in every person and be part of that success, they want to be a community company given the opportunity to every person to live there dream of being healthy and athletic. The key words from the company inspiration and innovation.
I think I will like to work for a company that take in consideration human potential and more I will like to work for a company with a high economic status. It is important know your company and prove the stability of the business, for that reason thru this annual report I discover the importance of the business and more the importance of making the right decision to prevent majors consequences. Nike company filed a shelf registration statement with the Securities and Exchange Commission under which $760 million in debt securities may be issued. As of May 31, 2010, we had no amounts outstanding under our multi? ear, $1 billion revolving credit facility in place with a group of banks. Our $1 billion commercial paper program also provides liquidity. We also make ongoing estimates relating to the net realizable value of inventories, based upon our assumptions about future demand and market conditions. If it’s estimate that the net realizable value of inventory is less than the cost of the inventory recorded on books, NIKE record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to cost of sales.
If changes in market conditions result in reductions in the estimated net realizable value of inventory below the previous estimate, then would increase our reserve in the period in which the company made such a determination and record a charge to cost of sales. Reputation is very important in business and maintains this status requires a lot of strategy. | Chapter 5: Validate Your Conclusion – Question 1The Altman Z-score is a predictive model created by Edward Altman in the 1960’s. The score combines and weights five financial ratios to estimate the likelihood of a company going bankrupt.
The lower the Altman Z-score the higher the odds of bankruptcy. Research findings suggest the Z-score predicts 72 – 80% of corporate bankruptcies two years prior to the actual filing. * Z-score > than 3 = considered healthy * Z-score between 1. 8 and 3 = considered a warning sign * Z-score < than 1. 8 = could be headed for bankruptcyComputing the Z-score for your company is very simple. Go to one of the Websites listed below and compute the Z-scores for the respective years identified below. Print out your results and turn them in with this workbook. * www. jaxworks. com/calc2a. tm * www. ironwoodadvisory. com/zscore. htm| | Two Years Prior| One Year Prior| Current Year| Z-score| 4. 0| 3. 7| 4. 0| Z-score interpretation compared to the financial analysis. Does the Z-score agree or disagree with your analysis? | Based on the interpretation on the Z score the Nike company is in a good shape and solid business. Therefore the analysis on my corporate report is consistence and favorable. The strategy is once again proved. | Congratulations. Now submit to your instructor your completed workbook per the instructions provided at the beginning of this document.