Income Statement and Nike Term Paper

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Inventory

Nike addresses futures ordering on page 64 of its FY 2016 Form 10-K. The futures ordering program "allows retailers to order five to six months in advance of delivery" at a fixed price. This program allows Nike to gain some advance knowledge of future demand, assisting the company to schedule its production accordingly with expected future demand. The company notes, however, that this program does not prevent excess or short inventory in the future, as not all retailers use the program and ultimately demand is not fixed. Excess demand results in inventory write-downs, or moving inventory around the market, or other tactics to recover the cost. On page 92, the company specifically addresses inventory reserves. When the company estimates that the realizable value of its inventory is less than the cost of the inventory, it will create an allowance on the books for this expected loss on that inventory. The reserve is recorded as a charge to the cost of sales. This reserve can be increased or decreased based on changing information.

Nike records inventories at "lower of cost or market and (they) are valued on either an average or specific identification cost basis" (p.106). This is consistent with the company's expectation that it will at the very least be able to recover cost. But the inventory reserve exists for those situations where Nike does not expect to recover cost on certain inventories.

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The company describes Plant, Property and Equipment on page 106. These are recorded at cost, using straight line depreciation for buildings and leasehold improvements, and long-lived machinery. On page 109, it notes the following categories of Property, Plant and Equipment: land, buildings, machinery/equipment/software, leasehold improvements, and construction in process. The category of machinery, equipment and software is the largest, with buildings and leasehold improvements also being significant line items in this category.

The smallest portion of the balance of Property, Plant and Equipment is land. Land value is also recorded before accumulated depreciation, so may be lower than is recorded. The accumulated depreciation section is not broken down by category. Construction in progress is the second-smallest category but there is not going to be any accumulated depreciation on that particular category. It would be ideal if there was more detail on the exact breakdown for the accumulated depreciation.

Moreover, the annual report would benefit from a clearer breakdown of the property that the company holds. We….....

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