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Nikes Form 10-K Historical Costs Sandra Armenta South University Online Professor Emily Baculik July 1, 2011

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Nikes Form 10-K Historical Costs Financial statements are important for a firm to determine their financial status and profitability. Companies have the task of determining whether to report financial items at the historical cost, which is the acquisition cost minus depreciation, or at the fair value, which is the market value of the item at the time the report is prepared. At times it may be more beneficial to report using a combination of both historical cost and fair value cost. In reviewing the Balance Sheet included in Nikes Form 10-K, we can evaluate which items would be recognized at historical costs. In general, most assets and liabilities are reporting using the historical cost, however the information provided in the balance sheet is often criticized for not reporting a more relevant fair value (Kieso, Weygandt, & Warfield, 2010, p. 179). Using historical costs can cause some items to be undervalued while others are overvalued. Current assets and current liabilities could be overstated for various reasons. Current assets could be overstated as inflation causes fluctuation in the prices. For example, if inventories are recorded at $200,000, but the current acquisition prices of those items in inventory have reduced by 10%, the actual value, or fair value would only be $180,000. Current liabilities can also be overstated if the actual value of these liabilities has changed. For example, you may have Accounts Payable recorded at the historical cost of $350,000, but there have been changes due to discounts and returned items. Long term assets and liabilities can also be understated due to appreciation on the asset such as property. The economy has a lot to do with the changes in the value of long term assets and liabilities. For example, long term debt can be overstated if interest rates go down on, which would reduce the amount of long term debt that is currently owed.

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Nike appears to disclose the fair market value on the notes to the financial statements. This is a requirement of the FASB under SFAS No. 157 which defines fair value, establishes a framework for measuring fair value in accordance with [GAAP], and expands disclosures about fair value measurements (Nike, 2007, p. 59). Accountants and Executives of the company may prefer to see a more accurate accounting of assets and liabilities as well, which requires the notes to the financial statements to include this information. The total assets listed on their balance sheet as of May 31, 2007 are approximately $10.7 million, which seems a little low. Nike is a popular company with a large variety of products, in fact the NK-10 form describes them as the largest seller of athletic footwear and athletic apparel in the world (Nike, 2007, p. 2). They also sell under other brand names such as Converse, ExeterBrands Group, Hurley, NIKE Bauer Hockey and NIKE. Current liabilities are valued at approximately $2.6 million. A liability is determined to be a current liability based on the amount of time it will take to pay it. Current liabilities will be paid within one year. For example, long term debts are debts that it will take more than one year to pay, however, the amount to be paid within the current year is reported under current liabilities as Current portion of long term debt. The notes to the financial statements prepared by Nike appeared to be very adequate. It was very detailed and provided specific information about all the categories of the financial statements. It also informed the reader of their reasoning for the reporting processes, including regulatory requirements. Financial statements are an important asset for determining the financial status of a company. Reporting this information using historical costs can be advantageous in some cases, but disastrous in others. It is important to determine which is the reporting procedure would be

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the best for the company. Preparing detailed notes to accompany the financial statements is also very informative to the readers of this information. It can not only provide additional clarification on some items, it can help to understand the entire reasoning behind the reporting process.

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References Kieso, D., Weygandt, J, and Warfield, T. (2010).Intermediate Accounting, 13th Edition. Hoboken, NJ: John Wiley and Sons Nike (2007, May 31). Nike Form 10-K.Retrieved from http://docsharing.next.ecollege.com/%28NEXT%2800985e85e3%29%29/Main/CourseM ode/DocSharing/ListCategoriesAndFilesView.ed#

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Nikes Form 10-K Balance Sheet and Statement of Cash Flow Sandra Armenta South University Online Professor Emily Baculik July 7, 2011

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Nikes Form 10-K Balance Sheet and Statement of Cash Flow The balance sheet and the statement of cash flow are two very important financials reports that a company provides to investors, creditors, executives and stockholders. The balance sheet reports the assets, liabilities and stockholders equity during the reporting period indicated (Kieso, Weygandt, & Warfield, 2010, p. 178). The balance sheet provides the information needed to assess the companys liquidity, solvency and financial flexibility (Kieso, Weygandt, & Warfield, 2010, p. 178). The statement of cash flow is useful as it reports cash receipts, cash payments, and net change in cash resulting from a companys operating, investing and financing activities during a period (Kieso, Weygandt, & Warfield, 2010, p. 1244). The balance sheet can be prepared in two different formats, account form and report form. The account format has all assets listed on the left side of the page and the liabilities and stockholders equity on the right side of the page. The report format lists assets and then below that the liabilities and below liabilities is the stockholders equity. In reviewing the financial reports on Nikes Form 10-K, we can establish that the format of their balance sheet is the report format. Most assets and liabilities are recorded on the balance sheet at historical values, but some items can be recorded at fair value. According to the Notes to the Consolidated Financial Statements, Nike uses fair value for certain items. The items reported at fair value are cash and cash equivalents, available for sale debt securities, derivatives, notes payable and long term debt. Reporting these items at fair value is an excellent choice. As the value of the dollar changes, the value of cash and cash equivalents will change, so reporting at fair value gives a more accurate

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value in the balance sheet. For all other items over time the interest rates and changes in economy can change the value of these items. Reporting them at fair value allows them the ability to provide the most accurate information in the balance sheet. They also indicated in the notes that for one of the subsidiaries, Exeter Group, all assets and liabilities are recorded at fair value. In assessing liquidity based on the balance sheet, cash and cash equivalents are the most liquid, followed by all current assets. Current assets are considered most liquid because the cash will be obtained within the current year. The least liquid of all assets would be goodwill. For the company to obtain cash for goodwill, they would need to sell the company. On Nikes Form 10-K, goodwill, patents and trademarks are included in intangible assets. These items are considered intangible assets because they lack physical substance and are not financial instruments (Kieso, Weygandt, & Warfield, 2010, p. 186). Nikes long term debts consist of Corporate Bonds payable and Japanese Yen notes payable. The additional long term liabilities are listed under deferred income taxes and other liabilities and commitments and contingencies. These areas include all items expected under long term liabilities. The statement of cash flow also provides important information. This financial report can show where the most amount of cash is received and where the most amount of cash is used. On Nikes Form 10-K Consolidated Statement of Cash Flow, the biggest source of cash was maturities of short-term investments in the amount of $2,516.2 million. The purchase of short term investments was the biggest use of cash in the amount of ($2,133.8) The balance sheet and the statement of cash flow both provide investors, creditors, executives and stockholders with important information about the company. The balance sheet

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shows the liquidity, solvency and financial flexibility of the company, while the cash flow statement shows the change in cash from the previous reporting period and where the most cash is obtained and the most cash is used. This information gives company executives the necessary information to make any changes necessary to increase financial stability.

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References Kieso, D., Weygandt, J, and Warfield, T. (2010).Intermediate Accounting, 13th Edition. Hoboken, NJ: John Wiley and Sons Nike (2007, May 31). Nike Form 10-K.Retrieved from http://docsharing.next.ecollege.com/%28NEXT%2800985e85e3%29%29/Main/CourseM ode/DocSharing/ListCategoriesAndFilesView.ed#

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Nikes Form 10-K Income Statement and Revenue Recognition Policy Sandra Armenta South University Online Professor Emily Baculik July 15, 2011

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Nikes Form 10-K Income Statement and Revenue Recognition Policy The income statement is another important financial statement that helps to evaluate past performance as well as the probability that a certain level of cash flows will be achieved in the future. There are also limitations to the income statement since items that cannot be measured reliably will be omitted and income amounts are based on estimates (Kieso, Weygandt, & Warfield, 2010, p. 132). The income statement can be completed in two ways; a multiple step income statement or a single step income statement. The multiple step income statement is more detailed and it separates operating and nonoperating activities. The single step income statement only shows revenues and expenses. In a large company such as Nike, which has different subsidiaries located in different countries, the single step is the most convenient format to use. Including Notes to the Consolidated Financial Statements can help to inform the reader of any missing details in the income statement. As indicated in their notes to the consolidated financial statements, they use estimates in several areas, including revenues and expenses (Nike, 2007, p. 39). I dont see a need to use estimates in these areas because the income statement is completed at the end of the year based on the activities for the year. The actual amount of revenues and expenses should be available which would negate the need for estimates. Goodwill is another area that Nike uses estimates for, which is understandable because it is hard to measure goodwill so it is estimated at fair value. Nikes primary revenue source is their line of footwear with revenue of $8,514 million in 2007 and their apparel line with revenue of $4,576.5 million in 2007. The gross margin as a percentage of sales for 2007 was 43.88%, which was down slightly from 2006 which was at

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44.05%. Over the three year period reported on the Statement of Income, they have stayed very close to a percentage of 44% (Nike, 2007, p. 50). For Nike, the geographical area that has the highest amount of net revenues is the United States. This is as I would expect, due to the popularity of Nike with not just teenagers but with adults as well. In addition, according to the notes to their financial statement, The Companys largest concentrations of long-lived assets are in the United States and Japan (Nike, 2007, p. 77).
However these long lived assets in the United States are substantially higher than those in Japan.

Nike has various revenue recognition policies due to their diverse operations. Wholesale revenues are recognized when the title passes to the customer. Depending on the agreement with the customer, this could be upon shipment or upon receipt. This could also vary based on the country where the sale is made. For retail sales, revenue is recognized at the time of the sale (Nike, 2007, p. 40). With their many subsidiaries, Nike has many customers that they sell to, in many different countries. The major customer that Nike has included in its revenue is Foot Locker. This seems appropriate since their highest revenues come from the sale of foot wear. In 2007, 2006, and 2007, revenues derived from FootLocker, Inc. represented 10 percent, 10 percent and 11 percent of the Companys consolidated revenues,respectively (Nike, 2007, p. 77) The income statement provides useful information on the revenues and expenses that the company has experienced for the year. The single step method is not as detailed as the multiple step income statement, but it provides the important financial figures needed to assess the current performance compared to prior years. With either format the notes to the consolidated financials is just as important as it gives additional details that are needed in making an assessment. The

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revenue recognition policy, geographical areas that are the most profitable and the major customers that revenue is obtained from are very useful to the readers. These are the types of things found in the notes to the financials.

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References Kieso, D., Weygandt, J, and Warfield, T. (2010).Intermediate Accounting, 13th Edition. Hoboken, NJ: John Wiley and Sons Nike (2007, May 31). Nike Form 10-K.Retrieved from http://docsharing.next.ecollege.com/%28NEXT%2800985e85e3%29%29/Main/CourseM ode/DocSharing/ListCategoriesAndFilesView.ed#

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Nikes Form 10-K Cash, Receivables and Inventory Sandra Armenta South University Online Professor Emily Baculik July 22, 2011

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Nikes Form 10-K Cash, Receivables, and Inventory The balance sheet also provides important information to management, investors and creditors. By providing information on assets, liabilities, and stockholders equity, the balance sheet provides a basis for computing rates of return and evaluating the capital structure of the enterprise (Kieso, Weygandt, & Warfield, 2010, p. 178). One very important part of the balance sheet is the current assets which include the cash and cash equivalents, receivables and inventory. The notes to the consolidated financial statements also provide very important information and explanations necessary to understand the financial statement preparation. Current assets are listed on the balance sheet in order of liquidity, so the first item is cash and cash equivalents (Kieso, Weygandt, & Warfield, 2010, p. 181). These are the most liquid of the current assets. Cash is any currency on hand or any deposits that are in a financial institution that can be obtained easily. Cash equivalents are other highly liquid short term assets or investments. Nike, Inc. reports in their notes to the financial statements that cash equivalents represent short-term, highly liquid investments with maturities of three months or less at date of purchase (Nike, 2007, p. 54). They also indicate that the amounts reported for cash and cash equivalents are approximate fair value. The next liquid asset listed on the balance sheet is the current accounts receivables. They have reported in the notes to the financial statements that Accounts receivable with anticipated collection dates greater than twelve months from the balance sheet date and related allowances are considered non-current and recorded in other assets (Nike, 2007, p. 55). In the current accounts receivable, the do allow for bad debt, but it is not listed separately on the balance sheet. They record the net amount of accounts receivables on the balance sheet and the notes to the

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financial statements reports the amounts of uncollectable accounts receivable were recorded. For May 31, 2007, they recorded $71.5 million in uncollectable accounts receivable, however, $33.3 million applied to non-current assets that were recorded in other assets (Nike, 2007, p. 55). In calculating the allowance for bad debts, they look at the historical amount of credit losses they have experienced and review the creditworthiness of significant customers (Nike, 2007, p. 55). Inventory is the next liquid asset listed on the balance sheet. Nike uses various valuation methods based on whether it is wholesale operations or retail operations. In the wholesale operation valuations are based on a first-in, first-out (FIFO) or moving average cost basis (Nike, 2007, p. 55). In the retail operations the valuation of inventories at cost is calculated by applying a cost-to-retail ratio to the retail value inventories (Nike, 2007, p. 55). The balance sheet shows that all current assets have increased from the previous year except short term investments. The total current assets increased from $7,346.0 million in 2006 to $8.076.5 million in 2007. This increase could be attributed to an increase in sales and a decrease in bad debts. Cash and cash equivalents are almost double in 2007 compared to 2006. The largest percentage of current assets is accounts receivable, at $2,294.7 million. This is expected as sales most likely increased. The numbers in the balance sheet show that Nike is not only a well-known company, but they are still growing and remain extremely profitable. The increase in accounts receivable and inventories show that sales have possible increased. The large increase in cash and cash equivalents could be an indication that bad debts have decreased. The notes to the financial statements have provided the information needed to properly analyze the information provided in the balance sheet.

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References Kieso, D., Weygandt, J, and Warfield, T. (2010).Intermediate Accounting, 13th Edition. Hoboken, NJ: John Wiley and Sons Nike (2007, May 31). Nike Form 10-K.Retrieved from http://docsharing.next.ecollege.com/%28NEXT%2800985e85e3%29%29/Main/CourseM ode/DocSharing/ListCategoriesAndFilesView.ed#

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Nikes Form 10-K Inventory Reserves, Property, Plant & Equipment & Gains and Losses Sandra Armenta South University Online Professor Emily Baculik July 29, 2011

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Nikes Form 10-K Inventory Reserves, Property, Plant & Equipment & Gains and Losses The balance sheet contains a large amount of important data to help in evaluating the financial stability of a company. We previously reviewed inventories, but many companies create inventory reserves. The balance sheet also provides the value of property, plant and equipment. The results of all this information reported on the balance sheet also reveals any gains or losses the company experienced during the period. Inventory reserves are reported in an asset contra account, in which a company retains an estimated charge for inventory that it has not yet specifically identified . . . (Bragg, 2011, para. 1). This missing inventory could be caused by spoilage or theft. In this case it should be recorded at a value lower than the originally recorded cost. This is considered a conservative approach since the company is taking the initiative to estimate their losses in inventory before they have confirmed that a loss has occurred (Bragg, 2011, para. 4). Nike, Inc. reports inventory reserves as a charge to cost of sales (Nike, 2007, p. 40). Nike bases their estimates of reserves on assumptions regarding future demand and the market conditions. As reported in the notes to the consolidated financial statements, Nike Inc. (2007) states: If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value (p. 40).

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I do not agree with this method of reporting reserves. This appears to be simply recording the difference creating an inventory reserve account based on the difference of lowerof-cost-or-market. This is just a difference in the value of the inventory currently on hand, not an actual reserve based on missing inventory items. I think the reserve should be reported as the difference between perpetual inventory and physical inventory at the end of the period. Nike Inc. uses the retail inventory method for their retail operations. Under the method they use, the valuation of inventories at cost is calculated by applying a cost-to retail ratio to the retail value inventories (Nike, 2007, p. 55). To maintain this cost-to-retail relationship, markdowns, whether permanent or point of sale, reduce both the retail and cost components of the inventory on hand (Nike, 2007, p. 55). Inventories are assets, but more durable assets would be property, plant and equipment. Property, plant and equipment include land, buildings and equipment. Property, plant and equipment have three major characteristics: (1) They are acquired for use in operations and not for resale. (2) They are long-term in nature and usually subject to depreciation. (3) They possess physical substance. (Kieso, Weygandt, and Warfield, 2010, p. 490). Included in the property, plant, and equipment reported for Nike, Inc. are land, buildings, machinery and equipment, leasehold improvements, construction in process, computer hardware and software, and accumulated depreciation (Nike, 2007, p. 41 & 60). These items are reported at cost, although if there is an indication that the carrying value is impaired, they estimate the future undiscounted cash flows to be derived from the asset to determine whether or not a potential impairment exists (Nike, 2007, p. 41). These undiscounted cash flow estimates may

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change in the future for various reasons including technological changes, economic conditions, changes to our business operations or inability to meet business plans (Nike, 2007, p. 41). Machinery and equipment is the largest portion of the total property, plant and equipment, with a balance of $1,817.2 million in 2007 (Nike, 2007, p. 60). This is not unusual since they manufacture multiple products and have multiple locations where this machinery and equipment is located. Construction in process makes up the smallest portion of the balance at $94.4 million. With worldwide facilities, they probably dont have much need for new land or buildings, but they could anticipate expanding their operations to more countries than they are already present in. I think it would be valuable to give more detail on the face of the balance sheet by expanding property, plant and equipment to list all the assets. This would give the reader a clear view of where the most money is invested in long term assets, without having to refer to the notes to the consolidated balance sheet. Current assets have been somewhat expanded, so it would make sense to expand on the long term assets. In reviewing the Income Statement, there are no obvious gains and losses reported. However, if the notes are reviewed, it explains what is included in some of the reported items. For example, Other (income) expense, net refers to notes 5 and 16. If you refer to the notes provided by Nike, Inc. (2007), it is stated that: Other (income) expense, net is comprised substantially of gains and losses associated with the conversion of non-functional currency receivables and payables, the re-measurement of foreign currency derivative instruments,

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disposals of fixed assets, as well as other unusual or non-recurring transactions that are outside the normal course of business (p. 27). I think the gains and losses are reported this way, because it is not obvious by looking at the income statement if there were any gains or losses. If the losses are substantial, it is not immediately identifiable. The details are found only in the notes to the consolidated financial statement. The balance sheet of Nike, Inc. has provided a large amount of important data. There are changes that can be made to make this report clearer to the readers, such as investors and creditors. Expanding on property, plant and equipment and expanding the income statement to clearly state gains and losses are a few areas that would make these statements more valuable. Inventory reserves are an excellent way to report discrepancies in inventory items due to theft or spoilage.

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References Bragg, S. (2011, February 1). What is an inventory reserve? Accounting Tools. Retrieved from http://www.accountingtools.com/questions-and-answers/what-is-an-inventoryreserve.html Kieso, D., Weygandt, J, and Warfield, T. (2010).Intermediate Accounting, 13th Edition. Hoboken, NJ: John Wiley and Sons Nike (2007, May 31). Nike Form 10-K.Retrieved from http://docsharing.next.ecollege.com/%28NEXT%2800985e85e3%29%29/Main/CourseM ode/DocSharing/ListCategoriesAndFilesView.ed#

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Nikes Form 10-K Depreciation and Impairments Sandra Armenta South University Online Professor Emily Baculik August 2, 2011

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Nikes Form 10-K Depreciation and Impairments There are various adjustments that affect the assets on the balance sheet and net income on the income statement. The most common are depreciation and impairments. These are applied to long-term assets and reduce the book value of the asset. This creates a decrease in total assets and a decrease in net income. Depreciation is applied to long-term assets under property, plant, and equipment. Assets such as buildings, machines, office equipment, and delivery equipment depreciate over the life of the asset. To record this, a company will use depreciation. Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset (Kieso, Weygandt, & Warfield, 2010, p. 540). There are several methods of depreciation, including the activity methodwhich is based on the unit it produces or the number of hours it works (Kieso, Weygandt, & Warfield, 2010, p. 543). Another method is the straight line method which is the most commonly used. A third method is the decreasing charge method where the depreciation is higher in the early years and decreases in later years (Kieso, Weygandt, & Warfield, 2010, p. 544). Two ways to apply the decreasing charge method are the sum-of-the-years-digits method and the declining-balance method. Nike, Inc. depreciates property, plant and equipment using the straight line method. They determine the useful life of each asset. Buildings and leasehold improvements are depreciated over 2 to 40 years, machinery and equipment are depreciated over 2 to 15 years and computer software is depreciated over 3 to 10 years (Nike, 2007, p. 55). When circumstances arise that result in a difference between the estimated and actual useful life of the asset, Nike, Inc. adjusts

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their depreciation expense over the remaining useful life to depreciate the assets net book value to its salvage value (Nike, 2007, p. 41). Impairment is the second form of adjustment made that will affect the value of assets on the balance sheet and the income statement. Impairment is the condition that exists when the carrying amount of a long-lived asset (asset group) exceeds its fair value (Impairment, n.d.). To determine if there is an impairment loss, the company must first review any events or circumstances that have changed to identify any possible impairment. If this review reveals an impairment, they must perform a recoverability test. If the sum of the expected future net cash flows from the long-lived asset is less than the carrying amount of the asset, an impairment has occurred (Kieso, Weygandt, & Warfield, 2010, p. 552). Then once it is obvious there is an impairment, they must calculate the amount of the loss. This amount is the difference between the carrying amount of the asset and the fair value (or market value) of the asset. Nike, Inc. discusses impairments in the notes to the consolidated financial statement under property, plant and equipment. When events or circumstances indicate that the carrying value of property, plant and equipment may be impaired, we estimate the future undiscounted cash flows to be derived from the asset to determine whether or not a potential impairment exists (Nike, 2007, p. 41). The impairment is calculated as the difference between the carrying value and their estimate of the fair value, and the net value of these impairment charges are recorded under other expense (or income). Economic and circumstantial changes may affect the estimates of undiscounted cash flows, which may result in impairment charges in the period in which such changes in estimates are made (Nike, 2007, p. 41) .

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Adjustments are not always clearly identified on the financial statements. The notes to the consolidated financial statements are important for explaining these adjustments. Nike, Inc. has clearly explained their method for making these adjustments, including the useful life of their long-term assets. It also clearly states the alternatives taken when changes take place that affect these adjustments.

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References Financial Accounting Standards Board (n.d.).Impairment. Retrieved http://asc.fasb.org/glossary&letter=I Kieso, D., Weygandt, J, and Warfield, T. (2010).Intermediate Accounting, 13th Edition. Hoboken, NJ: John Wiley and Sons Nike (2007, May 31). Nike Form 10-K.Retrieved from http://docsharing.next.ecollege.com/%28NEXT%2800985e85e3%29%29/Main/CourseM ode/DocSharing/ListCategoriesAndFilesView.ed#