Accounting 400A

Intermediate Financial Accounting

Project #2

Analysis of Nike’s 2022 10K

Kennedy Bailey, 9:30am Section
Megan Sims, 9:30am Section
1. Describe the format of the income statement (single-step, multi-step, hybrid) and identify
why you describe it that way.
The format of Nike’s income statement is multi-step because the statement separates items based
on their classification of either operating or nonoperating and uses intermediate subtitles. (See
Reference 1)

2. Utilize the footnote addressing significant accounting policies to identify the method used
to depreciate PP&E.
According to the footnotes, the straight-line method is used to calculate the depreciation on
PP&E for land improvements, buildings, and leasehold improvements for 2 to 40 years and for
machinery and equipment for 2 to 15 years. (See Reference 2)

3. Think about the business model utilized by your selected company (how do they sell their
products or services to customers). Utilize the footnote addressing significant accounting
policies to summarize how they recognize revenue and any specific issues related to
revenue recognition that they need to consider given their business model. Examples could
include selling on credit, receiving payments in advance, sales returns, gift cards,
collectability concerns, etc.
Control is transferred to customers once the item has shipped during an online purchase or at the
time of the sale when bought in a retail sale location. Once control has passed, the revenue will
be recognized. When items are sold on credit, Nike increases allowance for doubtful accounts
based on anticipated sales returns and discounts. (See Reference 3)

4. Evaluate the trend in sales/revenue over the past three years. Calculate the year over
year percentage change in revenue. Discuss what you believe is driving the change in sales
considering what you know about the company, the industry, and the overall economic
conditions.
Nike experienced an increase in revenue of 19.1% from 2020 to 2021 and an increase of 4.9%
from 2021 to 2022. The significant increase in 2021 revenue was likely accelerated as a result of
the stabilization of economic conditions following the COVID-19 pandemic, the growth of
Nike’s Direct business, and the reduction of wholesale accounts. (See Reference 1 and 5)

5. Evaluate the trend in net income over the past three years.
a. Calculate profit margin (net income as a percent of revenue). Perform vertical analysis
on key items (calculating each item as a percentage of revenue) of the income statement to
help identify reasons for the change in profit margin rates between years.
Vertical Analysis (% of Revenue)
2022 2021 2020
Net revenue 100.0% 100.0% 100.0%
Cost of sales 54.0% 55.2% 56.6%
Gross margin 46.0% 44.8% 43.4%
Research and development 8.2% 7.0% 9.6%
Marketing, general and administrative 23.5% 22.3% 25.5%
Other operating expenses 31.7% 29.2% 35.1%
Operating income 14.3% 15.6% 8.3%
Income before taxes 14.2% 15.0% 7.7%
Provision for taxes 1.3% 2.1% 0.9%
Net income 12.9% 12.9% 6.8%
(See Reference 1)
b. Calculate the year over year percentage change in net income. Compare the percentage
change in revenue from question #5 to the percentage change in net income.
Nike’s net income increased by 125.6% from 2020 to 2021 and they had an additional increase
in net income from 2021 to 2022 of 5.6%. This large increase from 2020 to 2021 was likely from
sales growth post COVID-19. More specifically, revenue went up by 19% and COGS only went
up by 16%. They were not only able to increase their sales but keep their cost of production
down. (See Reference 1).

Horizontal Analysis (% change YOY)

2021 to 2022 2020 to 2021
Net revenue 4.9% 19.1%
Cost of sales 2.7% 16.1%
Gross margin 7.6% 22.9%
Demand and creation expense 23.6% -13.3%
Operating overhead expense 10.5% 4.0%
Total selling and administrative expense 13.7% -0.8%
Operating income -3.8% 122.7%
Income before taxes -0.2% 130.7%
Provision for taxes -35.2% 168.4%
Net income 5.6% 125.6%

c. Analyze and discuss your findings.

As discussed in the 10K, in 2021 and 2022, Nike decreased the amount of wholesale purchases.
By selling directly from the website and their own stores, they were able to bring in a larger
amount of revenue.

Additionally, in 2021 they reduced the number of employees overseas. In 2021, Nike saw an
expense from the termination of so many employees. In 2022, they did not see an expense or
loss from this, but rather a gain from the absence of the wage expense.

6. Compute your company’s current ratio and debt to equity ratio for both years presented
in the balance sheet. Analyze and discuss what these ratios tell you about the company.

Select Nike Ratio's 2022 2021
Current Ratio 2.63 2.72
Debt to Equity Ratio 1.64 1.96

Nike has a great current ratio. It can be interpreted as for every $1 of current liabilities, they have
$2.63 of current assets to pay off their current liabilities. An investor would see that the company
would be easily able to pay off their short-term liabilities making Nike a good investment.
Nike’s current ratio; however, decreased from 2021 to 2022. This can be linked to an increase in
assets and shows that the company now has less short-term liquidity.

Nike has relatively average to concerning financial solvency as seen by the debt-to-equity ratio.
A ratio of 1.64 can be interpreted as for every $1 of equity, they have $1.64 dollars of debt. A
debt-to-equity ratio greater than one indicates that more than 50% of a company’s assets are
funded by debt. Many investors would consider a debt-to-equity ratio of 1.96 a risky investment.
However, we see a decrease in this number in 2022, where we see more of the company’s assets
being funded by cash. Furthermore, the company has greater financial solvency in 2022
compared to 2021. (Reference 4 and 6).

7. Select a competitor and calculate current ratio and profit margin for the competitor’s
most recent year. Compare to your calculations for your company. Analyze and discuss.
We selected Lululemon as one of Nike’s main competitors. The tables below demonstrate
Lululemon’s current ratio and profit margin in comparison to Nike’s. (Reference 9 and 10)

Current Ratio 2022 2021

Lululemon 1.86 2.41
Nike 2.63 2.72
Profit Margin 2022 2021 2020
Lululemon 15.59% 13.38% 16.22%
Nike 12.94% 12.86% 6.79%

The current ratios of Lululemon and Nike are similar across both years. Lululemon’s current
ratio is consistently lower than Nike’s. In 2021, the lululemon current ratio is lower than Nikes
by 0.31. In 2022, Lululemon’s current ratio is significantly lower than Nike’s with a difference
of 0.77. This difference suggests that Nike is able to cover current liabilities by current assets
with greater ease. On the contrary, Lululemon has fewer assets to cover liabilities.

Nike and Lululemon show similar profit margins in 2021, yet differ signficantly in 2022 and
2020. Across all three years, Lululemon’s profit margin is higher than Nike’s. This suggests that
Lululemon has a higher percentage of profits generated for each dollar of sale. The significant
difference in the profit margin between the two companies in 2020 may be an indicator of the
additional costs Nike faced as a result of instabiltiy in the midst of the COVID-19 pandemic.
 References

Reference 1- Consolidated Income Statement

Reference 2 – Note 2: Accounting Policies (Property, Plant and Equipment)

Reference 3 – Note 2: Accounting Policies (Revenue Recognition)

Reference 4 – Consolidated Balance Sheets

Reference 5 – Management’s Discussion and Analysis of Financial Condition and Results of
Operation

Reference 6 – Statement of Shareholders Equity

Reference 7 – Lululemon’s Consolidated Income Statement

Reference 8 – Lululemon’s Consolidated Balance Sheet