ACC 345 Module Two Summary -NIke

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Southern New Hampshire University *

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345

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Accounting

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Apr 3, 2024

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ACC 345 Module Two Summary Template 1. Define the measurement of each type of ratio and the accounts included in the calculation. Refer to the Ratios tab. Let’s First Look at the Liquidity Ratios. The current ratios that were calculated involve the total existing assets divided by the total current liabilities from the balance sheet.  The quick ratios that were calculated affect cash and cash equivalents as well as the accounts receivable net divided by the total current liabilities from the balance sheet.  The working capital is the total current liabilities subtracted from the actual existing assets from the balance sheet. We will next look at the activity ratios.  The receivable turns are the total revenue from the income statement divided by the accounts receivable net from the balance sheet.  The days in receivables are the days in a year divided by the receivable turns .  The revenues/working capital is the total revenue from the income statement divided by the working capital.  The revenues/fixed assets are the total revenue from the income statement divided by the property, plant, and equipment net from the balance sheet.  The revenues/total assets are the total revenue from the income statement divided by the total assets from the balance sheet.  The inventory turns are the inventory from the balance sheet divided by the cost of sales from the income statement.  The days in inventory are the number of days in a year divided by the inventory turns.

 Payable Turns are the cost of sales from the income statement divided by the accounts payable from the balance sheet .  The days in payables are the number of days in a year divided by the payables turns. We are now going to look at the coverage/leverage ratios .  The fixed assets/equity is the property, plant, and equipment net divided by the total equity from the balance sheet. We will lastly look at the profitability ratios.  The return on equity is the net income (loss) before tax on the income statement divided by the total equity on the balance sheet.  The return on total assets is the net income (loss) before tax from the income statement divided by the total assets from the balance sheet.  The net profit on revenues is the net income (loss) before tax divided by the total revenue from the income statement. 2. Explain the significance of each ratio to the company.  The Current Ratio is an indicator of its solvency. If the ratio is lower than the industry standard, it may indicate a greater risk of default. Our company is toward the top of the standard of 3. (Fernando, 2023)  Quick Ratio is a more conservative measure than the Current Ratio. The higher the ratio, the better the company's liquidity and financial health. The inverse indicates the company will have a hard time paying its debts. Our company is above 1, and this is considered good. (Seth, 2022).  Working Capital that is substantial indicates a company will have extra cash to invest in expansions for the growth of the company. (Fernando, 2022a)

 Receivable Turns : A low receivable turn ratio indicates potential issues with its collection procedures or department. It could also mean high-risk customers receiving credit that should not. Our company is above the average with a good turnover of 7.8. (Murphy, 2022).  Days in Receivables shows quickly how many days the company takes to collect its receivables. Assuming the company has Net 30 terms, 2020 is a year indicating efficient collections of receivables. Whereas 2021 and 2022 show they are getting paid on average 6.5 days late for all receivables. (Murphy, 2022)  Revenues/Working Capital - It will be indicated by the ratio of the revenue produced by its working capital. For example, in 2020, the ratio of 3.05 means that for every dollar of working capital used, the company earned $3.05 in revenue. (Hayes, 2021).  Revenues/Fixed Assets analysts use this metric to measure the company's operating performance. It shows how well its investments in Property, Plant, and Equipment benefit its revenue production. Our company has been trending upwards over the three years and has a good FAT. (Kenton, 2023)  Revenues/Total Assets: a higher ratio will indicate the company can generate a high amount of revenue from its assets. The assets it holds are efficient and valuable to the company's operations. Any amount over one is considered suitable for a manufacturing company. Our company is favorable all three years. (Hayes, 2022).  Inventory Turns with a high ratio indicate high sales and efficient ordering of products. Low inventory turnover can indicate low sales or poor purchasing strategy. In our company, 2020 only sold or used 35% of their inventory. This is not an ideal

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ratio. In the two subsequent years, they have increased their inventory turnover but are still below the desirable 4-6 range. (Fernando, 2023a).  Days in Inventory: this metric indicates how many days inventory is sitting before it is used or sold. I was interested in 2020’s number of 1048 days. This could mean inventory was way over-purchased or the wrong inventory was purchased. (Fernando, 2023a)  Payable Turns are helpful to see how a company manages its finances related to inventory purchases. If a company has a lower ratio, it indicates they are not paying off their accounts payable about their sales and will create a liquidity issue. They will get further in the hole financially. (Murphy, 2020).  Days in Payable can either indicate financial health or weakness. If they are consistently days over on their net Accounts payable terms, this shows they are having issues paying their debts related to inventory. If their terms are net 60, then all three years Nike looks good, but if their terms are net 30, they are consistently late and have liquidity issues. Between 8 and 10 is an excellent payable turn. In 2022, our company fell below that metric. (Murphy, 2020)  Fixed Assets/Equity - To understand the ratio, it is understood that a ratio of .60 means shareholders have financed 60% of the debt, and the remaining 40% is financed by debt holders. A ratio of less than .65 is not desirable because it indicates that the shareholders only own 65% of the company. In liquidation, the debt holders will be the first to collect. Our company is trending downwards in shareholder asset ownership. In the event of liquidation, currently, the debt holders would be paid the

first 69% of the proceeds, leaving only the remaining 31% for shareholders. (Equity to Fixed Assets Ratio - Meaning, Assumptions and Interpretation, n.d.)  Return on Equity: This company is above the SEP average of 18.6%. This could be positive, or it could indicate problems since it is so much higher than the average. This might be due to the reduced shareholders’ interest in owned assets, previously looked at in the Fixed Assets to Equity Ratio. Our company is way above industry standard in all three periods. (Fernando, 2023a).  Return on Total Assets: this ratio shows how a company uses its assets to produce earnings. The higher the ratio, the better the company is using its assets. However, it is mentioned that the ratio can depend on market value versus the book value being used.  A ROA of over 5% is considered good; our company is good and trending the previous two years near the excellent range of 20%. (Kenton, 2021a)  Net Profit from Revenues is a significant indicator of a company's financial health. It looks at revenue, operating, and overhead costs. It is stated that future profits can be forecasted by looking at this metric. For example, our company has been trending upward in the last two years. (Murphy, 2022a 3. Identify an asset or liability being measured at fair value. Provide the specific disclosure note(s). Include the citation(s).  An asset measured at fair value was the intangibles in the non-current assets section of the balance sheet. “Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at

the measurement date. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement (SEC).  Note 7 indicates the carrying amounts reflected in the Consolidated Balance Sheets for Notes payable of approximate fair value. The citation for this 10-K is as follows: Nike Inc. Form 10-K 2022. Beaverton, OR: Nike Inc.; 2022. 4. Provide the classification for the GAAP rule that allows the fair value measurement. International Financial Reporting Standards and U.S. GAAP continue to agree regarding accounting for fair value measures primarily. The foundation for calculating fair value under IFRS is in IFRS 13, Fair Value Measurement, which defines fair value by ASC 820. Unless otherwise specified by the applicable codification topic that requires or permits the appropriate value measurement, any difference between the transaction price and fair value for assets or liabilities required to be measured at fair value is immediately recognized as a gain or loss in earnings.

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References Bragg, S. (September 8, 2022). Profitability Ratios Definition. https://www.accountingtools.com/articles/profitability-ratios.html Dynamics, G. A. A. P. (n.d.) (2023). Accounting Resources for ASC 820 and IFRS 13. GAAP https://www.gaapdynamics.com/insights/accounting-topics/fair-value-measurements-accounting- resources-for-asc-820-and-ifrs-13#:~:text=Under%20U.S.%20GAAP%2C%20for%20assets,fair %20value%20measurement%20specifies%20otherwise . Equity to Fixed Assets Ratio - Meaning, Assumptions and Interpretation. (n.d.) (2023).. https://www.managementstudyguide.com/equity-to-fixed-assets-ratio.htm FASB Accounting Standards Codification®. (n.d.-b). (2023). https://asc.fasb.org/1943274/2147477863 Fernando, J. (June 29, 2029). Working Capital: Formula, Components, and Limitations. https://www.investopedia.com/terms/w/workingcapital.asp Fernando, J. (March 3, 2023). Current Ratio Explained With Formula and Examples. Investopedia. https://www.investopedia.com/terms/c/currentratio.asp Kenton, W. (November 8, 2022). Activity Ratios: Definition, Formula, Uses, and Types. https://www.investopedia.com/terms/a/activityratio.asp#:~:text=What%20Is%20an%20Activity %20Ratio,to%20generate%20revenues%20and%20cash . Liquidity Ratio . Corporate Finance Institute. (March 5, 2023). https://corporatefinanceinstitute.com/resources/accounting/liquidity-ratio/