Advanced Financial Accounting Analysis: Nike Inc. Case Study

This assignment provides a comprehensive analysis of Nike's financial accounting practices. It addresses key topics such as Nike's mission statement and its implications, the role of management estimates in accounting policies, and the concept of window dressing and its ethical implications. The assignment further explores business combinations, outlining the reasons for mergers, the steps involved in a merger transaction, and the obstacles that can lead to merger failures. Additionally, it examines the exceptions to non-consolidation of financial statements and the advantages of consolidated financial statements. The analysis is supported by references to relevant academic literature and Nike's annual reports, offering a detailed understanding of the company's financial strategies and accounting practices.

ADVANCED FINANCIAL ACCOUNTING
STUDENT ID:
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Question 1
The mission of Nike is to inspire every athlete and to bring innovation for the same. The
mission of the statement goes well with the core philosophy of the founder Bill Bowerman
who believed that everyone is an athlete and hence potentially highlights that potentially
everyone is a customer (Nike, 2017).. Additionally, from the mission statement, the focus on
innovation is apparent and as a result over the years company has focused on bringing new
products meant at specific needs of the athletes in different sports.
Question 2
a) Estimates have been made by the management of Nike most significantly with regards to
the accounting policies where considerable leeway is available to the management and it is
required that appropriate policies be chosen for the available options. The decision in this
regards can have a material impact on the financial statements which has been highlighted in
the annual report in Nike. An example can be taken to illustrate the same with the example of
inventory valuation which has direct influence on the cost of goods sold and hence can
understate or overstate the profit. Also assumption has been made by the management with
regards to the following (Nike, 2017).
 Revenue Recognition
 Inventory reserves
 Allowance for uncollectible accounts receivable
 Contingent payments under endorsement contracts
 Hedge accounting for derivatives
 Stock-based compensation
 Income taxes and other contingencies
b) Window dressing is an umbrella term which refers to the measures taken by a company in
typically prior to the release of the financial statements so as to alter them in a manner which
tends to provide an incorrect but usually better financial performance appearance on the part
of the reporting entity. Some of the measures include changing accounting policies in order to
enhance the profitability even though the same is not accurate representation. Also, some

revenues from the future may be included in the current accounting period. While these
practices are not illegal, but the same is unethical since it results in presenting the users with
inaccurate information thereby adversely influencing their decision making (Damodaran,
2015).
Some of the noticeable examples of window dressing have been by companies such as Enron
and Lehmann Brothers whereby the accurate picture of liabilities was not presented by the
management and creative accounting policies were used. Typically, if window dressing is
continued in the long run it may lead to bankruptcy and significant wealth erosion for
shareholders (Deegan, 2014).
Question 3
Business combination refers to a transaction whereby a particular company is acquired
(obtaining control) by another company (Deegan, 2014). There are various reasons why
companies merge. Some of the critical reasons are highlighted as follows (Petty et. al., 2015).
 Some companies may acquire unrelated company to diversify the business.
 Other companies may acquire competitor or smaller businesses in the same line of
business to enhance geographical presence or consolidate the business by enhancing
the market share.
 The merging of companies is largely driven by synergy related gains whereby the
operational profitability can increase by reducing the costs related to common
activities required through economies of scale.
 Mergers are also driven by competitive advantage along with strategic intent which
can enable the company to have an edge over the competitors in terms of scale, scope
and financial resources available.
Question 4
The following steps need to be performed with regards to merger transaction (Parrino and
Kidwell, 2014).
 Identification of potential candidates of mergers
 Assessment of fit and strategic position with the target company
 Take a decision regarding the potential candidate
 Perform a valuation analysis

 Conduct due diligence, perform negotiation
 Execution of transaction
 Integration of firm
The various obstacles to merger that lead to failure are as follows (Damodaran, 2015).
 Incompatible culture between the target and acquirer firm
 Resistance from the employees of target
 Lack of due diligence
 Issues related to integration of the merger
 Overvaluing the target firm and thus making higher payments
Question 5
Various exceptions to non-consolidation of financial statements are as listed below (Gluzova,
2015).
 The parent firm has control of the subsidiary firm only for a limited or temporary
period.
 The subsidiary firm contribution is insignificant and owing to immateriality, the
consolidated statements may not be prepared.
 When the parent company is an intermediate level, then consolidation is not required.
In such situations, the parent company has a superior consolidated group.
 When the parent company has made investment with the objective of earning
investment income and does not control the operations.
The advantages of consolidated financial statements are listed below (Deegan, 2014).
 The transactions between the parent and subsidiaries are automatically reconciled and
a consolidated picture is presented.
 This is highly useful when the parent firm has multiple subsidiaries and hence the
consolidated financial statements may be quite useful in comparison to analysing the
individual financial statements of various subsidiaries.

References
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney: McGraw-Hill
Gluzova, T. (2015) Consolidation Exemptions under IFRS, Procedia Economics and
Finance, 25(2), pp. 32 – 40
Nike (2017) Annual Report FY2017, [online] Available at
https://s1.q4cdn.com/806093406/files/doc_financials/2017/ar/docs/nike-2017-form-10K.pdf
[Accessed November 1, 2018]
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French
Forest Australia