Nike Current Assets Analysis: Balance Sheet Breakdown
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.
- Accounts Receivable and Bad Debt Allowances: How Nike adjusts receivables for estimated bad debts
- Cash and Cash Equivalents: Composition of Nike's cash and liquid assets
- Inventory Valuation: Lower-of-cost-or-market method applied to Nike inventory
- Year-Over-Year Current Asset Trends: Comparing 2015 and 2016 current asset totals
- Interpreting Changes in Current Assets: Linking asset changes to revenue and efficiency
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What makes this paper effective
- The paper grounds every claim directly in Nike's 2016 Form 10-K, making the analysis concrete and verifiable rather than speculative.
- It applies accounting concepts — prudence, lower-of-cost-or-market, liquidity — accurately and explains them in accessible terms before applying them to Nike's data.
- The year-over-year comparison provides analytical depth, connecting balance sheet figures to revenue growth and operational efficiency.
Key academic technique demonstrated
The paper demonstrates financial statement analysis by moving systematically through each current asset category, explaining the valuation method used, citing specific dollar figures from the 10-K, and then drawing interpretive conclusions. This technique — define the concept, identify the firm's treatment, report the number, interpret the implication — is a reliable model for any accounting case analysis.
Structure breakdown
The paper opens with accounts receivable and bad debt policy, then addresses cash and cash equivalents (including hedging-related collateral), followed by inventory valuation. The final two paragraphs shift to comparative analysis, contrasting 2015 and 2016 current asset totals and connecting balance sheet movements to the firm's revenue trajectory. The conclusion offers a brief efficiency interpretation without overstating the evidence.
Accounts Receivable and Bad Debt Allowances
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 and Cash Equivalents
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).
Inventory Valuation
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.
References
Libby, R., Libby, P., & Short, D. G. (2011). Financial Accounting. Maidenhead: McGraw-Hill Higher Education.
Nike. (2016). Form 10-K. Retrieved from http://s1.q4cdn.com/806093406/files/doc_financials/2016/ar/docs/nike-2016-form-10K.pdf
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