Nike, Inc. Consolidated Statements of Income Year Ended December 31 (In Millions) 2019 2018

4/3/22, 5:34 PM A3
Question 5 Correct Mark 10.00 out of 10.00
Compute and Interpret Liquidity, Solvency and Coverage Ratios

Information from the balance sheet, income statement, and statement of cash flows for Nike follows. Refer to these financial statements to
answer the requirements.
NIKE, INC.
Consolidated Statements of Income

Year Ended December 31 (In millions) 2019 2018
Revenues $39,117 $36,397
Cost of sales 21,643 20,441
Gross profit 17,474 15,956
Demand creation expense 3,753 3,577
Operating overhead expense 8,949 7,934
Total selling and administrative expense 12,702 11,511
Interest expense (income), net 49 54
Other (income) expense, net (78) 66
Income before income taxes 4,801 4,325
Income tax expense 772 2,392
Net income $ 4,029 $ 1,933

Consolidated Balance Sheets
May 31 (in millions)
2019 2018
Current Assets
Cash and cash equivalents $ 4,466 $ 4,249
Short-term investments 197 996
Accounts receivable, net. 4,272 3,498
Inventories 5,622 5,261
Prepaid expenses and other current assets 1,968 1,130
Total current assets 16,525 15,134
Property, plant and equipment, net 4,744 4,454
Identifiable intangible assets, net 283 285
Goodwill 154 154
Deferred income taxes 2,011 2,509
Total assets $23,717 $22,536
Liabilities and stockholders' equity
Current Liabilities
Current portion of long-term debt $6 $6
Notes payable 9 336
Accounts payable 2,612 2,279
Accrued pension liabilities 5,010 3,269
Income taxes payable 229 150
Total current liabilities 7,866 6,040
Long-term debt 3,464 3,468
Deferred income taxes and other liabilities 3,347 3,216
Shareholders’ equity
Class A convertible—315 and 329 shares outstanding -- --
Class B—1,253 and 1,272 shares outstanding 3 3
Capital in excess of stated value 7,163 6,384
Accumulated other comprehensive income (loss) 231 (92)
Retained earnings 1,643 3,517
Total shareholders’ equity 9,040 9,812
Total liabilities and stockholders' equity $23,717 $22,536

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Consolidated Statement of Cash Flows

Year Ended May 31 (in millions) 2019 2018
Cash provided by operations:

Net income $4,029 $1,933
Adjustments to reconcile net income to net cash provided by operations:
Depreciation 705 747
Deferred income taxes 34 647
Stock-based compensation 325 218
Amortization and other 15 27
Net foreign currency adjustments 233 (99)
Changes in certain working capital components and other assets and liabilities:
(Increase) decrease in accounts receivable (270) 187
(Increase) decrease in inventories (490) (255)
(Increase) decrease in prepaid expenses and other current and non-current assets (203) 35
Increase (decrease) in accounts payable, accrued liabilities and other current and
non-current liabilities 1,525 1,515
Cash provided by operations 5,903 4,955
Cash provided (used) by investing activities:
Purchases of short-term investments (2,937) (4,783)
Maturities of short-term investments 1,715 3,613
Sales of short-term investments 2,072 2,496
Additions to property, plant and equipment (1,119) (1,028)
Disposals of property, plant and equipment 5 3
Other investing activities. -- (25)
Cash provided (used) by investing activities (264) 276
Cash used by financing activities:
Long-term debt payments, including current portion (6) (6)
Increase (decrease) in notes payable (325) 13
Payments on capital lease and other financing obligations (27) (23)
Proceeds from exercise of stock options and other stock issuances 700 733
Repurchase of common stock (4,286) (4,254)
Dividends—common and preferred (1,332) (1,243)
Tax payments for net share settlement of equity awards (17) (55)
Cash used by financing activities (5,293) (4,835)
Effect of exchange rate changes on cash and equivalents (129) 45
Net increase (decrease) in cash and equivalents 217 441
Cash and equivalents, beginning of year 4,249 3,808
Cash and equivalents, end of year $4,466 $4,249
(a) Compute the current ratio and quick ratio for 2018 and 2019. Note: Round answers to two decimal places.
2019 current ratio = 2.1 
2018 current ratio = 2.5 
2019 quick ratio = 1.14 
2018 quick ratio = 1.45 
Which of the following best describes the company's current ratio and quick ratio for 2019 and 2018?
The current ratio has increased while the quick ratio has decreased in the period from 2018 to 2019 , which suggests the company has a
shortage of liquid assets.
Both the current and quick ratios have decreased from 2018 to 2019 however,
the company is liquid.
Both the current and quick ratios have increased from 2018 to 2019, meaning the company is liquid.
The current ratio has decreased while the quick ratio has increased from 2018 to 2019, which suggests
the company has a shortage of
current assets.
(b) Compute total liabilities-to-equity ratio and total debt-to-equity ratio for 2018 and 2019.
HINT: Nike's total debt has three components reported on the balance sheet. Note: Round answers to two decimal places.
2019 total liabilities-to-equity = 1.62 
2018 total liabilities-to-equity = 1.3 
4/3/22, 5:34 PM A3
2019 total debt-to-equity = 0.38 
2018 total debt-to-equity = 0.38 
Which of the following best describes the company's total liabilities-to-equity ratios and total debt-to-equity ratios for 2019 and 2018?
The total liabilities-to-equity ratio has decreased while the total debt-to-equity ratio has increased in the period from 2018 to 2019, which
suggests the company has decreased the use of short-term debt financing.
The total liabilities-to-equity

ratio has increased while the total debt-to-equity ratio remained the same in the period from 2018 to 2019,
which suggests the company has increased the use of short-term debt financing.
Both the total liabilities-to-equity and total debt-to-equity

ratios have increased from 2018 to 2019. These increases suggest that the
company is less solvent.
Both the total liabilities-to-equity and total debt-to-equity ratios have decreased from 2018 to 2019. The difference between these two
measures
reveals that any solvency concerns would be for the short run.
(c) Compute times interest earned ratio, cash from operations to total debt ratio, and free operating cash flow to total debt ratios. Financial
statements included the following footnote: “Included in Interest expense (income), net was interest income related to the Company’s
investment portfolio of $82 million and $70 million for the years ended May 31, 2019 and 2018, respectively.”
Note: Round answers to two decimal places.
2019 times interest earned = 36.43 
2018 times interest earned = 35.85 
2019 cash from operations to total debt = 1.7 
2018 cash from operations to total debt = 1.3 
2019 free operating cash flow to total debt = 1.38 
2018 free operating cash flow to total debt = 1.03 
Which of the following describes the company's times interest earned, cash from operations to total debt, and free operating cash flow to total
debt ratios for 2019 and 2018? (Select all that apply)
yes  Nike's free operating cash flow to total debt ratio increased over the year 2019 due to increased cash flow from operations and a
decrease in debt.
no  Nike's times interest earned decreased during 2019, due an increase in interest expense.
yes  Nike's cash from operations to total debt ratio increased over the year 2019 due to an increase in cash flow from operations and
a decrease in total debt.
no  Nike's times interest earned increased during 2019, due to an decrease in profitability.
(d) Summarize your findings in a conclusion about the company's credit risk. Do you have any concerns about the company's ability to meet
its debt obligations?
Nike's total debt-to-equity is low, thus increasing any immediate solvency concerns. The company's ability to meet its debt requirements
will depend on increasing short-term debt.
Nike's quick ratio is low,

thus increasing immediate solvency concerns. The company's ability to meet its debt requirements will depend on
liquidating inventories for emergency cash.
Nike's times interest earned ratio is strong, thus lessening any immediate solvency
concerns. The company's ability to meet its debt
requirements will depend on its continued profitability.
Nike's total liabilities-to-equity is high, thus lessening any immediate solvency concerns. The company's ability to meet its debt
requirements
will depend on its use of equity financing.
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4/3/22, 5:34 PM A3

Question 5 Correct Mark 10.00 out of 10.00

Compute and Interpret Liquidity, Solvency and Coverage Ratios

Consolidated Statements of Income

Consolidated Statement of Cash Flows

Cash provided by operations:

2019 current ratio = 2.1 

2018 current ratio = 2.5 

2019 quick ratio = 1.14 

2018 quick ratio = 1.45 

2019 total liabilities-to-equity = 1.62 

2018 total liabilities-to-equity = 1.3 

2018 total debt-to-equity = 0.38 

The total liabilities-to-equity

Both the total liabilities-to-equity and total debt-to-equity

Note: Round answers to two decimal places.

2019 times interest earned = 36.43 

2018 times interest earned = 35.85 

2019 cash from operations to total debt = 1.7 

2018 cash from operations to total debt = 1.3 

2019 free operating cash flow to total debt = 1.38 

2018 free operating cash flow to total debt = 1.03 

Nike's quick ratio is low,

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