Question

Forecasting the Income Statement, Balance Sheet, and Statement of Cash Flows

Following are the financial statements of Nike, Inc.

Consolidated Statements of Income
	Year ended May 31
In Millions	2011	2010
Revenues	$ 20,862	$ 19,014
Cost of sales	11,354	10,214
Gross profit	9,508	8,800
Demand creation expense	2,448	2,356
Operating overhead expense	4,245	3,970
Total selling and administrative expense	6,693	6,326
Interest expense (income), net	4	6
Other (income)	(33)	(49)
Income before income taxes	2,844	2,517
Income taxes	711	610
Net income	$ 2,133	$ 1,907

Balance Sheets
	May 31
In Millions	2011	2010
Assets
Cash and equivalents	$ 1,955	$ 3,079
Short-term investments	2,583	2,067
Accounts receivable, net	3,138	2,650
Inventories	2,715	2,041
Deferred income taxes	312	249
Prepaid expenses and other current assets	594	873
Total current assets	11,297	10,959
Property, plant and equipment, net	2,115	1,932
Identifiable intangible assets (net)	487	467
Goodwill	205	188
Deferred income taxes and other assets	894	873
Total assets	$ 14,998	$ 14,419
Liabilities and Shareholders' Equity
Current portion of long-term debt	$ 200	$ 7
Notes payable	187	139
Accounts payable	1,469	1,255
Accrued liabilities	1,985	1,904
Income taxes payable	117	59
Total current liabilities	3,958	3,364
Long-term debt	276	446
Deferred income taxes and other liabilities	921	855
Total liabilities	5,155	4,665
Common stock at stated value	3	3
Capital in excess of stated value	3,944	3,441
Accumulated other comprehensive income	95	215
Retained earnings	5,801	6,095
Total shareholders' equity	9,843	9,754
Total liabilities and shareholders' equity	$ 14,998	$ 14,419

We forecast Nike's income statement using the following forecast assumptions:

Revenue growth based on growth in revenues from 2010 to 2011	10%
Cost of sales/Revenues	54.4%
Demand creation expense/Revenues	11.7%
Operating overhead expenses/Revenues	20.3%
Income taxes/Income before income taxes	25.0%

Instructions: Forecast Nike's fiscal year 2012 income statement.

Assume no change for: other income and interest expense.

Round forecasts to $ millions.

Do not use negative signs with your answers in the income statement.

Consolidated Statements of Income
($ millions)	2011	2012
Revenues	$20,862	$Answer 0.00 points out of 1.00
Cost of sales	11,354	Answer 0.00 points out of 1.00
Gross profit	9,508	Answer 0.00 points out of 1.00
Demand creation expense	2,448	Answer 0.00 points out of 1.00
Operating overhead expense	4,245	Answer 0.00 points out of 1.00
Interest expense, net	4	Answer 0.00 points out of 1.00
Other income	33	Answer 0.00 points out of 1.00
Income before income taxes	2,844	Answer 0.00 points out of 1.00
Income taxes	711	Answer 0.00 points out of 1.00
Net Income	$ 2,133	$Answer 0.00 points out of 1.00

We forecast Nike's balance sheet using the following forecast assumptions:

Accounts receivable/Revenues	15.0%
Inventories/Revenues	13.0%
Deferred income taxes/Revenues	1.5%
Prepaid expenses and other current assets/Revenues	2.8%
L-T deferred income taxes and other assets/Revenues	4.3%
Depreciation expense/Prior-year PPE, net (incl. in overhead)	17.3%
Amortization expense	$24
Accounts payable/Revenues	7.0%
Accrued liabilities/Revenues	9.5%
Income taxes payable/Revenues	0.6%
Deferred income taxes and other liabilities/Revenues	4.4%
Capital expenditures/Revenues	2.1%
Dividends/Net income	26.0%
Current portion of L/T due in 2013	$48

Instructions: Forecast Nike's fiscal year 2012 balance sheet.

Assume no change for: short-term investments, goodwill, notes payable, common stock, capital in excess of stated value and accumulated other comprehensive income.

Round forecasts to $ millions.

Balance Sheet
($ millions)	2011	2012
Assets
Cash and equivalents	$ 1,955	$Answer 0.00 points out of 1.00
Short-term investments	2,583	Answer 0.00 points out of 1.00
Accounts receivable, net	3,138	Answer 0.00 points out of 1.00
Inventories	2,715	Answer 0.00 points out of 1.00
Deferred income taxes	312	Answer 0.00 points out of 1.00
Prepaid expenses and other current assets	594	Answer 0.00 points out of 1.00
Total current assets	11,297	Answer 0.00 points out of 1.00
Property, plant and equipment, net	2,115	Answer 0.00 points out of 1.00
Identifiable intangible assets, net	487	Answer 0.00 points out of 1.00
Goodwill	205	Answer 0.00 points out of 1.00
Deferred income taxes and other assets	894	Answer 0.00 points out of 1.00
Total assets	$14,998	$Answer 0.00 points out of 1.00
Liabilities and Shareholders' Equity
Current portion of long-term debt	$ 200	$ Answer 0.00 points out of 1.00
Notes payable	187	Answer 0.00 points out of 1.00
Accounts payable	1,469	Answer 0.00 points out of 1.00
Accrued liabilities	1,985	Answer 0.00 points out of 1.00
Income taxes payable	117	Answer 0.00 points out of 1.00
Total current liabilities	3,958	Answer 0.00 points out of 1.00
Long-term debt	276	Answer 0.00 points out of 1.00
Deferred income taxes and other liabilities	921	Answer 0.00 points out of 1.00
Total liabilities	5,155	Answer 0.00 points out of 1.00
Common stock at stated value	3	Answer 0.00 points out of 1.00
Capital in excess of stated value	3,944	Answer 0.00 points out of 1.00
Accumulated other comprehensive income	95	Answer 0.00 points out of 1.00
Retained earnings	5,801	Answer 0.00 points out of 1.00
Total shareholders' equity	9,843	Answer 0.00 points out of 1.00
Total liabilities and shareholders' equity	$14,998	$ Answer 0.00 points out of 1.00

Instructions: Forecast Nike's fiscal year 2012 stastement of cash flows.

Remember to use negative signs with your answers below, when appropriate.

Nike's Forecasted Statement of Cash Flows
($ millions)	2012 Est.
Net income	$ Answer 0.00 points out of 1.00
Add: depreciation	Answer 0.00 points out of 1.00
Add: amortization	Answer 0.00 points out of 1.00
Change in Accounts receivable	Answer 0.00 points out of 1.00
Change in Inventories	Answer 0.00 points out of 1.00
Change in Deferred income taxes	Answer 0.00 points out of 1.00
Change in Prepaid expenses & other current assets	Answer 0.00 points out of 1.00
Change in LT Deferred income taxes & other assets	Answer 0.00 points out of 1.00
Change in Accounts payable	Answer 0.00 points out of 1.00
Change in Accrued liabilities	Answer 0.00 points out of 1.00
Change in Income taxes payable	Answer 0.00 points out of 1.00
Change in LT Deferred income taxes and other liabilities	Answer 0.00 points out of 1.00
Net cash from operating activities	Answer 0.00 points out of 1.00
Capital expenditures	Answer 0.00 points out of 1.00
Net cash from investing activities	Answer 0.00 points out of 1.00
Dividends	Answer 0.00 points out of 1.00
Payments of LT debt	Answer 0.00 points out of 1.00
Net cash from financing activities	Answer 0.00 points out of 1.00
Net change in cash	Answer 0.00 points out of 1.00
Beginning cash	Answer 0.00 points out of 1.00
Ending cash	$ Answer 0.00 points out of 1.00

Answer 1

Nick's Forecasted Income Statement

($ millions)		2011			Assumptions						2012 Est.
Revenues.................................		20,862			20,862		x		1.10				22,948
Cost of sales............................		11,354			22,948		x		54.4%				12,484
Gross margin...........................		9,508											10,464
Demand creation expense........		2,448			22,948		x		11.7%				2,685
Operating overhead expense...		4,245			22,948		x		20.3%				4,658
Interest expense (income), net		4											4
Other (income).........................		(33)												(40)
Income before income taxes....		2,844											3,157
Income taxes............................		711			3,157		x		25.0%				789
Net income...............................		2,133											2,368

Balance Sheet
($ millions)				2011				Assumptions				2012 Est.
Cash and equivalents...........	$			1,955				22,948	x	9.4%		$	2,157
Short-term investments.......				2,583									2,583
New investments.................				0				plug					946
Accounts receivable, net.....				3,138				22,948	x	15.0%			3,442
Inventories...........................				2,715				22,948	x	13.0%			2,983
Deferred income taxes.........				312				22,948	x	1.5%			344
Prepaid expenses and other current assets..................				594				22,948	x	2.8%			643
Total current assets.............				11,297									13,098
Property, plant and equipment, net ................				2,115	+			482	-	366			2,231
Identifiable intangible assets, net........................				487					-	24			463
Goodwill..............................				205									205
Deferred income taxes and other assets......................				894				22,948	x	4.3%			987
Total assets.........................	$			14,998								$	16,984
Current portion of long-term debt..................................			$	200								$	48
Notes payable......................				187									187
Accounts payable................				1,469				22,948	x	7.0%			1,606
Accrued liabilities................				1,985				22,948	x	9.5%			2,180
Income taxes payable..........				117				789	x	16.5%			130
Total current liabilities........				3,958									4,151
Long-term debt....................				276					-	48			228
Deferred income taxes and other liabilities.................				921				22,948	x	4.4%			1,010
Common stock at stated value.................................				3									3
Capital in excess of stated value.................................				3,944									3,944
Accumulated other comprehensive income....				95									95
Retained earnings................				5,801	+			2,366	-	616			7,553
Total shareholders' equity...				9,843									11,595
Total liabilities and shareholders' equity.........			$	14,998								$	16,984

Nike’s Forecasted Statement of Cash Flows
($ millions)		Assumptions			2012 Est.
Net income...............................................					$	2,368
Add: depreciation.....................................						366
Add: amortization.....................................						24
Chg. Accounts receivable.........................		3,138	-	3,442		(304)
Chg. Inventories.......................................		2,715	-	2,983		(268)
Chg. Deferred income taxes.....................		312	-	344		(32)
Chg. Prepaid expenses and other current assets....................................................		594	-	643		(49)
Chg. L-T Deferred income taxes and other assets..........................................		894	-	987		(93)
Chg. Accounts payable.............................		1,606	-	1,469		137
Chg. Accrued liabilities............................		2,180	-	1,985		195
Chg. Income taxes payable.......................		130	-	117		13
Chg. L-T Deferred income taxes and other liabilities.................................................		1,010	-	921		89
Net cash from operating activities ............						2,446
Capital expenditures..................................		22,948	x	2.1%		(482)
Purchase of investments............................						(946)
Net cash from investing activities .............						(1,428)
Dividends...................................................		2,368	x	26.0%		(616)
Payments of LT Debt..................................						(200)
Net cash from financing activities ............						(816)
Net change in cash.....................................						202
Beginning cash..........................................						1,955
Ending cash...............................................					$	2,157

Summary: Our initial balance sheet reports total assets of $16,039 million and total liabilities and equity of $16,984 million. To balance the balance sheet, we can either reduce liabilities (i.e., pay down debt) or increase assets (i.e., purchase investments). Since Nike does not have a significant amount of short-term debt, we chose to increase marketable securities by $945 million. Nike’s return on investments was about 1.4% ($33 million / (($2,583 + 2,067)/2) million) in 2011. We assume that the company will realize the same return on investment in 2012 and that the additional investments will be purchased ratably over the year. Consequently, our forecast of investment income increases by $7 million ([$945 million / 2] x 1.4%) from $33 million to $40 million.