This paper examines the current assets reported on Nike's 2016 balance sheet as disclosed in the company's Form 10-K filing. It explores how accounts receivable are adjusted for estimated bad debts under the prudence concept, how cash and cash equivalents are defined and categorized — including cash collateral from hedging activities and short-term investments — and how inventory is valued using the lower-of-cost-or-market method. The paper then compares 2015 and 2016 figures, noting a slight overall decrease in current assets alongside increases in both inventory and cash equivalents, and considers what these trends suggest about Nike's operational efficiency relative to its rising revenue.
Current assets are an important element of the balance sheet. To understand what assets are available, however, it is necessary to examine how the asset classes are assessed and qualified. Receivables, for example, are an asset representing money that has been earned and is owed to the firm but not yet received. Looking at the Nike 10-K, the accounts receivable figure is adjusted to allow for bad debts (Nike, 2016). The firm has many customers, some of whom may fail to pay their accounts — whether due to bankruptcy, dispute, or other reasons. Under the prudence concept, Nike (2016) states that it makes an assessment of the level of bad debt likely to be suffered and deducts this from the accounts receivable shown as an asset. The firm does not provide details of the level of expected bad debt, merely stating that the estimate is based on historical analysis of past bad debt experience. Notably, accounts receivable is shown on the balance sheet as a net value after allowing for bad debts, meaning that the balance sheet for this category reflects only current, collectible accounts receivable. Where accounts receivable are not current, they are incorporated into deferred income taxes and other assets, which include uncollectible accounts.
Cash is simply cash held by the firm; however, cash equivalents typically refers to assets that are as liquid as cash (Libby, Libby, & Short, 2011). Nike (2016) states that its cash equivalents included several different types of assets: firstly, there was $105 million in cash collateral received from counterparties due to the firm's hedging activities. A category often incorporated within cash equivalents — but separated on the Nike balance sheet — is short-term investments, which included money market funds, corporate notes, U.S. Treasury bonds, and commercial paper (Nike, 2016). The cash equivalents also included some fixed-income investments; overall, the weighted average duration of cash equivalents was 91 days (Nike, 2016).
Inventories are also a current asset, and it is important to note the danger of inventory obsolescence. Inventory valuation at Nike (2016) is recorded at the lower of two measures: the cost of production or market value. The cost of production is primarily the amount the company pays to outsource suppliers for the production of goods, in addition to freight and transit fees, taxes, import duties, and insurance (Nike, 2016). Market value is assessed at the value that may be realised for the product. Where a product is moving towards obsolescence, it is possible that its market value will be less than its cost of production. The lower-of-cost-or-market method ensures that inventory is not overstated on the balance sheet in such circumstances.
"Comparing 2015 and 2016 current asset totals"
"Linking asset changes to revenue and efficiency"
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