Nike, Inc., reports the following information relating to its manufacturing activities in the footnotes to its 2018 10-K report:
We are supplied by 124 footwear factories located in 13 countries. The largest single footwear factory accounted for approximately 9% of total fiscal 2018 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2018, contract factories in Vietnam, China and Indonesia manufactured approximately 47%, 26% and 21 % of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina, India, Brazil, Mexico and Italy to manufacture footwear for sale primarily within those countries. For fiscal 2018, five footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 69% of NIKE Brand footwear production.
a. Wh.it effect does the use of contract manufacturers have on Nike’s balance sheet?
b. Nike executes purchase contracts with its contract manufacturers to purchase their output. How arc executory contracts reported under GAAP? Does your answer suggest a possible motivation for the use of contract manufacturing?
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