Nike's Financial Statements and Accounting Policies Explained
This paper examines Nike's core accounting policies and financial statement components as disclosed in the company's 2016 Form 10-K filing. Topics covered include Nike's straight-line depreciation method for buildings, machinery, and equipment; asset impairment procedures; and the structure and purpose of the three primary financial statements — the balance sheet, income statement, and statement of cash flows. The paper also addresses revenue recognition policies, key asset categories such as cash, accounts receivable, inventory, and plant and equipment, and explains how depreciation spreads the cost of long-lived assets over their useful lives.
- Nike's Depreciation Policy: Nike's straight-line depreciation rates by asset class
- Asset Impairment Procedures: How Nike handles incorrectly estimated asset useful lives
- Overview of Key Financial Statements: Purpose of balance sheet, cash flow, and income statements
- Revenue Recognition and Cash: Rules governing when and how revenue is recorded
- Balance Sheet Asset Categories: Definitions of accounts receivable, inventory, and plant assets
- Understanding Depreciation as an Accounting Concept: Depreciation mechanics illustrated with a numerical example
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What makes this paper effective
- Grounds all discussion in a specific, cited source — Nike's 2016 Form 10-K — which gives the analysis credibility and precision.
- Moves logically from company-specific policy (depreciation, impairment) to broader financial statement concepts, providing useful context for each item.
- Uses plain, accessible language to explain technical accounting terms without oversimplifying the underlying concepts.
Key academic technique demonstrated
The paper demonstrates the technique of anchoring conceptual definitions to real-world corporate disclosures. Rather than defining depreciation or revenue recognition in the abstract, the author ties each concept back to Nike's actual reported practice, showing how textbook accounting principles appear in a publicly filed document.
Structure breakdown
The paper opens with a direct quotation from Nike's 10-K to establish the company's stated depreciation policy, then addresses asset impairment as a related issue. It transitions into an overview of the three core financial statements — balance sheet, statement of cash flows, and income statement — before drilling into individual line items such as cash, accounts receivable, inventory, and plant and equipment. It closes with a plain-language explanation of depreciation mechanics using a concrete numerical example.
Nike's Depreciation Policy
In its 2016 Form 10-K, on page 106, Nike states its depreciation policy as follows:
Depreciation is determined on a straight-line basis for buildings and leasehold improvements over 2 to 40 years, and for machinery and equipment over 2 to 15 years.
Depreciation and amortization of assets used in manufacturing, warehousing, and product distribution are recorded in Cost of Sales. Depreciation and amortization of other assets are recorded in Operating Overhead Expense.
Asset Impairment Procedures
If Nike has incorrectly estimated the useful life of an asset and the asset becomes impaired, the company has a formal process to address this. Nike would impair the asset based on its remaining book value less the expected future cash flows generated by holding the asset.
If the asset turns out to be useful for longer than its remaining book value suggests, no action is required. Once a purchase has been fully depreciated, the asset carries no book value and no further expense is recorded — regardless of whatever ongoing economic benefit the asset may provide, since the company has already recognized all of the economic benefit of that purchase.
Overview of Key Financial Statements
A balance sheet is the financial statement that presents a company's assets, liabilities, and equity. The underlying principle is that all of a company's assets are acquired either through debt or through equity. The value of the company, therefore, equals the value of its assets minus its outstanding debts.
The statement of cash flows presents all cash inflows and outflows for the period. It is divided into three categories — operating, investing, and financing — to reflect these distinctly different types of financial activity.
The income statement presents the accounting income earned by the company. It begins with revenues, from which various expenses are deducted in sequence. The final line of the income statement is net income.
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