Income Statement and Nike

¶ … Nikes Income Sheet

The latest Nike 10-K covers the period ending 31st May 2016 (Nike, 2016). Looking specifically at the consolidated income statement, this is very short, and although there is a subcategory for gross profit. Nike, 2016). This is the two step format, as there is a breakdown of the categories, operating income is separated from non-operating income and there is a subcategory for gross profit, these indicate the two step process (PWC, 2016). However, in the consolidated income statement, the information is very limited. Looking though the accounts, the notes do provide more detail, such as Item 7 which provides details on sources of income and in come by type of sales, more details of lease and capital costs, while note 8 provides a more detailed breakdown of long-term debt (Nike, 2016),.

The income statement is meant to provide an accurate representation of the financial position of the company, this will inherently require a degree of estimation. In the income presented, there are estimates which impact on the revenues recognized. Therefore, the estimates also reflect the revenue recognition policies of Nike, which the firm states are based on actual sales made, adjusted for changes which are likely to occur after the accounting period has ended, based on knowledge and past trends (Nike, 2016). Under U.S. GAAP, and IFRS, so therefore under Nike policies, revenue is recognized when it is earned, and deemed realizable, rather than when the money is received (Accounting Study Guide, 2016). The accounts note that to present the level of revenues recognized during the period, it is necessary to estimate the levels of discount, along with any returns that will manifest as well as non-finalized claims (Nike, 2016). Many of these remained outstanding at the end of the accounting period. Nike have based the estimates on historical levels and patterns along with expected claims or discounts which have not been formalised. This would appear to be a viable and sensible approach. There are also some estimates associated with costs, such as royalty payments that will be payable to endorsers based on performance (Nike, 2016). Estimates also need to be made on the level of collections that will be made on debts owed to the firm from buyers. In these cases sales need to be finalized prior to the assessment of the royalty amounts. These different types of estimates all appear typical of large corporations.

Examining the revenues these totalled $32,376 million (Nike, 2016). The majority of revenues are generated by footwear, which accounts for $19,871 million of the sales (Nike, 2016), equivalent 63.37% of sales, this is followed by apparel accounting for $9.067 million (Nike, 2016) equal to 28% of sales. In terms of geographical markets, the largest operating segment is North America, accounting for $14,764 million, equal to 45.6% of sales, followed by Western Europe generating revenues of $5,884 million, equal to 18.17% of sales. The sales are increasing in all areas, apart from the emerging markets, where there was a decline of 5%, excluding China, which presented growth of 23%. This pattern may be expected, as firms are often most profitable in their own country. The growth in China may also reflect the general economic growth that is taking place in that area.

Overall, the firm is very profitable. In 2015 the monetary value of the gross profit increased from $14,067 million in 2015 to $14,971 million (Nike 2016). This was positive as the firm is showing growth, however, it is also showing an increased level of efficiency, as the gross operating profit has been increasing over the past few years, it was 43.6% in 2013, 44.8% in 2014, 46% in 2015 and 46.2% in 2016 (Nike, 2016).