Manoun 1  

Jamel Manoun

Bryan Sweeney

ACCT 2301.S07

1 December 2011

Annual Report Project:

Gap, Inc.

Manoun 2  

A. Introduction

Gap Inc. is a leading international specialty retailer with five brands – Gap, Banana

Republic, Old Navy, Piperlime and Athleta. Through the chief executive officer, Glenn Murphy,

and about 3,100 stores across the United States, United Kingdom, Canada, China, France,

Ireland, Japan and Italy, employees inspire creativity and offer great fashion advice to customers

around the world. The San Francisco based company has a fiscal year that is a 52- or 53-week

period ending on the Saturday closest to January 31. The ending date of the last fiscal year was

January 29, 2011. Gap Inc offers clothing, accessories and personal care products for men,

women, children and babies. The company’s auditor is one of big four audit firms, Deloitte &

Touche LLP. They believe the financial statements have been presented fairly and also were

pleased with the effectiveness of internal control over financial reporting. Financial statements

are not the responsibility of the independent accountants. Management is responsible for the

company’s financial statements and internal control over the financial statements. The

responsibility of the independent accountants is to express an opinion on the financial statements

and a company’s internal control. On 11/23/11, Gap Inc’s closing market price of the company’s

stock, GPS on the NYSE, was 17.80 and .45 dividends per share. For more information, go to

www.gap.com.

B. Industry Situation and Company Plans

The principles on which Gap was founded have stayed the same: creativity, delivering

results, doing what’s right and always thinking of our customers first. These principles are what

continue to make the company successful. The company's executive management team is

focused on restoring the health of the brands and pursuing growth opportunities overseas through

Manoun 3  

its online channels, franchise operations and international expansion. Gap Inc is growing

globally, and just last year, opened its first stores in China, Australia and Italy. In addition to

that, they are expanding online shopping to customers, too. Today, customers in over 80

countries can buy their products. Gap Inc. is closing nearly 200 stores and downsizing others in

the U.S. as it focuses on international expansion. Also, the company is going to balance its Gap

brand store closings by adding about 50 new Gap Outlet stores in North America.

C. Financial Statements

Income Statement:

The format of the Income Statement is most similar to a multi-step format, and all

numbers are in millions. The gross profit percentage is calculated using this formula: Gross

Profit Percentage= (Gross Profit)/(Net Sales). Therefore for 2009: (5,724)/(14,197)=40.3% and

for 2010: (5,889)/(14,664)=40.2%. The income from operations for 2009 was 1,815 and in 2010:

1,968. The net income for 2009 was 1,102 and the net income for 2010 was 1,204. Income from

operations increased by 153,000 from 2009 to 2010. The net income increased as well, going up

by 102,000 from 2009 to 2010.

Balance Sheet: Assets = Liabilities + Stockholders’ Equity.

In 2009, total assets = 7,564, total liabilities = 3,177, and total stockholders’ equity =

4,387. 7,564 = 7,564 (3,177 + 4,387).

In 2010, total assets = 7,985, total liabilities = 3,094, and total stockholders’ equity =

4,891. 7,985 = 7,985 (3,094 + 4,891).

Statement of Cash Flows:

For each of the past two years, the cash flows from operations (2009: 1,928 and 2010:

1,744) are more than the net income (2009: 1,102 and 2010: 1,204). Gap Inc’s main investing

Manoun 4  

activity is Maturities of short-term investments. And Gap Inc’s most important source of

financing consists primarily of the repurchases of common stock and dividend payments.

D. Accounting Policies

Cash and Cash Equivalents and Short-Term Investments:

The amounts in transit from credit card and debit card transactions that the banks process

in less than seven days are classified as cash. Cash equivalents are considered to be highly liquid

investments with maturities of 91 days or less at the date of purchase. While highly liquid

investments with maturities of greater than 91 days and less than one year from the balance sheet

date are classified as short-term investments. Cash equivalents and short-term investments are

classified as held-to-maturity.

Revenue Recognition:

Gap Inc. recognizes revenue and the related cost of goods sold at the time the products

are received by the customers. For store sales, revenue is recognized when the customer receives

and pays for the merchandise at the register.

Merchandise Inventories:

Gap Inc. values inventory at the lower of cost or market, with cost determined using the

weighted-average cost method. And examine inventory levels in order to identify slow-moving

merchandise. Management uses historical trends with similar merchandise, inventory aging,

forecasted consumer demand, to make assumptions to estimate the amount of merchandise

subject to markdown.

Property and Equipment Depreciation:

Depreciation is figured using the straight-line method over the estimated useful lives of

the related assets. Estimated useful life for the following categories include:

Manoun 5  

• Leasehold improvements - Shorter of lease term or economic life, up to 15 years

• Furniture and equipment - Up to 15 years

• Buildings and building improvements - Up to 39 years

• Software - 3 to 7years

Any maintenance costs or repairs are expensed when incurred.

Topics of other footnotes:

• Additional Financial Statement Information

• Acquisition, Goodwill, and Intangible Assets

• Credit Facilities

• Fair Value Measurements

• Derivative Financial Instruments

• Common Stock

• Share-Based Compensation

• Leases

• Income Taxes

None of the information in the notes would change my opinion of the company.

E. Ratio Analysis - $ in millions

• Test of Liquidity

1. Current Ratio (Current Assets/Current Liabilities): (4,664/2,131) = 2.19

2. Quick Ratio (Cash + Short-term investments + Net current receivables/Current liabilities): =

(1,561+100+150)/2,131 (1,811/2,130) = .85

• Asset Management

3. Inventory Turnover (Cost of good sold/Average inventory): (8,775/1491.5) = 5.88

Manoun 6  

4. Accounts Receivable turnover (Net credit sales/Average net accounts receivable):

(150/150+0) = 1 *Could not find accounts receivable for 2009 to calculate average

• Tests of Solvency and Equity Position

5. Debt Ratio (Total liabilities/Total assets): (3,094/7,985) = 38.7

6. Times interest earned (Operating income/Interest Expense): (1,968/8) = 246

• Tests of Profitability

7. Return on Net Sales (Net income/Net sales): (1,204/14,664) = 8.2

8. Return on Total Assets (Net income + Interest Expense/Average total assets):

(1,212/7774.5) = 15.6

9. Return on Common Stockholders’ Equity (Net income – Preferred dividends/Average

common stockholders’ equity): (1,204 – 234)/(4891- 4,387/2) (970/4,639) = 20.9

10. Earnings per share of Common Stock (Net income – Preferred dividends/Number of shares

of common stock outstanding): (1,204 – 234)/(676) (970/676) = 1.44

• Market Analysis

11. Price/earning ratio (Market price per share/Earning per share): (17.8/1.59) = 11.19

12. Dividend yield ratio (Dividend per share/Market price per share): (.45/17.8) = 2.5

Manoun 7  

F. Conclusion

Gap Inc. continues to expand the international reach of its brands through its franchise,

online and Company-operated channels. Here are some comparisons with industry averages:

Current ratio: Gap = 2.19 / Industry = 2.01

Quick ratio: Gap = .85 / Industry = 1.42

Inventory Turnover: Gap = 5.88 / Industry = 5.03

Return on Assets: Gap = 15.6 / Industry = 11.63

Return on Equity: Gap = 20.9 / Industry = 20.48

Price/earning ratio: Gap = 11.19 / Industry = 20.61

Dividend yield ratio: Gap = 2.5 / Industry = 2.3

Compared to some industry averages Gap Inc. looks like a solid investment. However, with

stores closing I would be hesitant to invest until all of the 2011’s financial statements become

available to calculate averages and compare them to the industry.