Nike’s principal business activity involves the design, development, and worldwide marketing of high-quality footwear, apparel, equipment, and accessory products for serious and recreational athletes. Almost 25,000 employees work for the firm. Nike boasts the largest worldwide market share in the athletic-footwear industry and a leading market share in sports and athletic apparel.
This case uses Nike’s financial statements and excerpts from its notes to review important concepts underlying the three principal financial statements (balance sheet, income statement, and statement of cash flows) and relationships among them. The case also introduces tools for analyzing financial statements.
Statement of Cash Flows
a. Why does the amount of net income differ from the amount of cash flow from operations?
b. Why does Nike add depreciation expense back to net income when calculating cash flow from operations?
c. Why does Nike subtract deferred income taxes from net income when calculating cash flow from operations for 2009?
d. Why does Nike subtract increases in accounts receivable to net income when calculating cash flow from operations for 2009?
e. Why does Nike adjust net income by subtracting increases in inventory and adding decreases in inventory when calculating cash flow from operations?
f. When calculating cash flow from operations, why does Nike adjust net income by adding increases and subtracting decreases in accounts payable and other current liabilities?
g. Nike recognized a gain from the divestiture of the subsidiary for the Bauer line of hockey apparel and equipment in 2008. Why does Nike subtract the gain on the divestiture from the operating activities? Why does Nike include the proceeds from the divestiture as an investing activity?
h. Given that notes payable appear on the balance sheet as a current liability, why does Nike include increases in this liability as a financing activity rather than as an operating activity?