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Financial Accounting - Gap Inc.

Go to http://www.gapinc.com and click on Investors. Click on Financials on the menu to the left. Then click on 2006 Annual Report under "Downloads" in the box to the right. Read the entire report, skimming the technical areas. Also start reading articles about the company...in print or online. This will give you a feel for the company and what happened during 2006.

Please note that, like most retailers, this company's fiscal year-end is the end of January or beginning of February. This is typical for retailers as their inventory is usually at its lowest at this time because it's after Christmas and the after-Christmas sales. So the February 3, 2007 Income Statement is for the year 2006. The January 28, 2006 Income Statement is for the year 2005. As with all annual reports, you will see that the company has shown both years for the Balance Sheets and three years for the Income Statements. For this assignment, you will be using the 2005 and 2006 years in your analysis.

Once completed, you will be submitting one MS Excel file and one MS Word file.

1 ) Prepare comparative statements in Excel using formulas for the analyses.

2) Prepare common-size statements in Excel for both the Balance Sheet and Income Statement using formulas for the analyses.

3) Using Word, comment on the changes you discovered in these two analyses.

4) Prepare a ratio analysis in Excel for both 2006 and 2005.

a. On the Excel worksheet, label the ratio and then the results for the two years. In Excel, you can use Control to view the formulas/computations. This is what I will do to correct your assignment. If the example I've shown below were in Excel, you could see that the 2.00 in 2006 shows a formula of 200000/100000. Do not simply type in 2.00

Ratio Analysis:

Ratio 2006 2005

Liquidity & Efficiency

Current Ratio 2.00 2.78

b. For the ratios that require averages, you will have to go to the company's 2005 annual report's financial statements to find the balances needed for 2004. For example, notice that the Inventory turnover is computed as COGS/Average Inventory. For 2006, you will use the Inventory balances for 2006 & 2005, divided by two. For 2005, you will use the balances for 2005 & 2004, divided by two.

5.) Using Word, comment on the company's
a.Liquidity & Efficiency
d.Market Prospects

Do not simply list your findings. These can already be found on the Excel analysis portions. You want to summarize the parts and tell me about what happened to the company between 2005 and 2006 that led to the changes in dollar amounts. This is where you will bring in the information you have been gathering about the company from the annual report and other resources. For instance, let's say you found significant increases in the company's assets and liabilities during the year. You would want to find out why this happened. Did they buy another company? Did they expand?

As another example, you might find that the company's current ratio decreased. You must state which part of the formula caused the change and why. It's not enough to say the company's current assets decreased while their current liabilities remained relatively constant. You need to find out why the CA decreased. Did they pay off a large portion of their long-term debt?

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Solution Preview

As of October 2006, Gap Inc. had approximately 150,000 employees and operated 3,139 stores worldwide in the United States, Canada, Mexico, France, Ireland, Japan,Indonesia, South Korea, Malaysia, Peru, Singapore, Turkey and the United Kingdom. (Wikipedia)

1) Kindly see the attached Excel file.

2) Kindly see the attached Excel file.

3) Horizontal analysis is conducted by setting consecutive balance sheet, income statement or statement of cash flow side-by-side and reviewing changes in individual categories on a year-to-year or multiyear basis. The most important item revealed by comparative financial statement analysis is trend. A comparison of statements over several years reveals direction, speed and extent of a trend(s). The horizontal financial statements analysis is done by restating amount of each item or group of items as a percentage.

Such percentages are calculated by selecting a base year and assign a weight of 100 to the amount of each item in the base year statement. Thereafter, the amounts of similar items or groups of items in prior or subsequent financial statements are expressed as a percentage of the base year amount. The resulting figures are called index numbers or trend ratios.

Vertical analysis involves expressing the items in proportion to some size-related measure, standardized financial statements can be created, revealing trends and providing insight into how the different companies compare.

The common size ratio for each line on the financial statement is calculated as follows:

Common Size Ratio = Item of Interest/ Reference Item

The ratios often are expressed as ...

Solution Summary

This solution looks at the Gap company and provides guidelines on preparing comparative statements, balance sheets, and income statements.