Overview of Financial Statements

The relationship between financial statements is a salient one. One may ask themselves why the balance sheet, income statement and the statement of cash flow are often set together in the financial report of a company. This paper is an overview of financial statements and the crucial roles they play in the financial reporting of a company using Nike as the case example.

The information below represents the net income over a five year period for Nike Inc.:

Table 1 : Financial Information Items (numbers in million dollars) 

These three financial statements are all related. The income statement, for example, normally describes how assets and liabilities in the accounting period covered were used. Cash flow statements, on the other hand, describe the influx and efflux of money in the company. Eventually, the cash flow statement reveals how much cash the organization has at hand. This is also reported in the balance sheet. Only a portion of the financial position of the company is revealed where individual financial statements are used. However, together they give a more wholesome picture on the financial position of the company (Leuz & Wysocki, 2016).

As could be seen in the case of Nike, using one of the financial statements only was very insufficient, especially from an investor’s perspective. Through the combination of all three financial statements, the investor could come up with the necessary financial ratios that can determine the financial strengths and shortcomings of the company. By calculating the quick ratio, for example, the potential investor could see that a value of higher than 1.0 would be beneficial as the company can easily pay off short-term debts.

In another example, one way in which financial statements can be used by potential investors is the calculation for free cash flow within the company. High-rolling investors normally love to invest in companies which can produce a lot of free cash flow. This is because such a company has a higher ability for debt repayment and the issuance of dividends. Furthermore, high free cash flow shows the investor that the company can amply buy back its stock and catalyze growth for its business – all of which are foundational to the investor’s perspective of a good investment company. This was obtained from a collective look at Nike’s financial statements.

Financial statements are not only important for third party analysis, but also for management purposes. While investors may be looking for information on the performance of the company, the management will also be looking to sell their performance based on their abilities within the leadership of the company. At the point where the current CEO came into the management of the company, the financial information that was available at the time was insufficient for the proper strategic planning that was required to take Nike to the next level. This was first changed, and inferences from this information were then used to revolutionize Nike to what it is now. For the formulation of ideas to move forward in the company, it was necessary to have adequate financial data that would transform into meaningful action. Retrospective analysis could thus be done to implement suggested improvements.

The management may also use financial statements to determine the financial condition of their company. Financial information may as well be used by the management to take corrective measures. For example, Nike realized it was no longer efficient producing very many products which would not sell as much. Therefore, financial information allowed the company to make brainstorming sessions where ideas would be subjected to testing before approval. Sinking ships were not let out of the company’s harbors. This way, the company effectively beat its competition, Reebok and Adidas.

In conclusion, financial statements are crucial for both the investor and the management, offering critical views into the company’s performance. Some of these trends would otherwise not be seen without sufficient investment into compiling financial statements. These benefits have been applied to Nike Inc., thereby showing an increased earning over the last twenty-five years.

References

Financial Morning Star. (2017). Statement of Cash Flow . Retrieved from Financial Morning Star: http://financials.morningstar.com/cash-flow/cf.html?t=NKE&region=usa&culture=en-US;

Financial Morning Star. (2017). Income statement. Retrieved from Financial Morning Star: http://financials.morningstar.com/income-statement/is.html?t=NKE;

Financial Morning Star. Balance Sheet. Retrieved from Financial Morning Star: http://financials.morningstar.com/balance-sheet/bs.html?t=NKE&region=usa&culture=en-US

Leuz, C., & Wysocki, P. D. (2016). The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2) , 525-622.