Michael OHara Accounting 102-H Case Study for Gap, Inc.

Liquidity Current Ratio: determines ability to pay short-term debt, Gap Inc. had a higher current ratio in 2009 with 2.19 times. Current assets and current liabilities can be found in Gaps 2010 Annual Report on the Balance Sheet. 2009 2010

Inventory Turnover: a measurement of how often inventory is restocked throughout the year. Gap, Inc. had a higher inventory turnover in 2009 with 5.68 times. Cost of Goods Sold is found on income statement in Gaps Annual Report. To calculate the average inventory for 2009 the average inventory was taken averaging the inventory from 2008 found in the 2009 Gap Annual Report Balance Sheet and the inventory from 2009. To calculate average inventory for 2010, the inventory accounts for 2009 and 2010 found in the 2010 Gap Annual Report Balance Sheet were averaged. 2009 2010 ) ) Profitability Profit Margin: income statement ratio that measures how a company is managing cost per dollar of sales. Gap, Inc. had a higher profit margin in 2010. Net Income and Net Sales for the respected years can be found on the Gap, Inc. Income Statement in the 2010 Annual Report. 2009 2010 ) )

Asset Turnover: ratio that determines how well assets are used to create sales. Gap, Inc. had a higher Asset Turnover in 2010. Average Total Assets for 2009 was found by averaging the 2008 Total Assets found in the 2009 Annual Report for Gap Inc. and the 2009 Total Assets from the 2009 Annual Report for Gap, Inc. To find the 2010 Average Total Assets, the 2009 and 2010 Total Assets are averaged found in the 2010 Gap, Inc. Annual Report.

Michael OHara Accounting 102-H Case Study for Gap, Inc. 2009 2010 ) ) Long Term Solvency Debt to Equity: ratio that measures the leverage and structure by showing the relationship of a companys liabilities to the amount of stockholders equity. Gap had a higher debt to equity ratio in 2010. Liabilities and Stockholders Equity for 2009 and 2010 can be found on the balance sheet in Gaps 2010 Annual Report. 2009 2010 ) )

Interest Coverage Ratio: this ratio measures the amount of protection creditors have from default on interest payments. 2009 had a higher interest coverage ratio in 2009. Income before taxes and interest expense can be found on the income statement in the 2010 Gap Annual Report. 2009 ) 2010 )

Cash Flow Adequacy Cash Flow Yield: shows how the net cash flow from operations generates cash for the company. Gap, Inc. had a higher cash flow yield in 2009. Net Cash flow from operations can be found on the Statement of Cash Flows in the 2010 Annual Report for Gap, Inc. 2009 2010

Cash Flow to Sales: This ratio shows the ability of a companys sales generating cash flow from operations. Cash Flow to Sales was higher in 2010. 2009

Michael OHara Accounting 102-H Case Study for Gap, Inc. 2010

Market Strength Price/Earning: This ratio shows the investors confidence in the company. 2009 had a higher Price/Earnings for Gap Inc. The Market Price Per Share was found by accessing the year-end market values for the 2009 Gap Year (ending Jan. 29, 2010) and the 2010 Gap Year (ending Jan. 30, 2011) on MSN Money. Earnings price per share was found on the Income Statement in the 2010 Gap, Inc. Annual Report. 2009 2010

Dividends Yield: this ratio measures the current return on a stock in the form of dividends. The Dividends Yield for Gap, Inc. was higher in 2010. The Dividends per share was found in Income Statement in the 2010 Annual Report for Gap, Inc. 2009 2010

Michael OHara Accounting 102-H Case Study for Gap, Inc. Analysis: The Gap, Inc. is a retail company that specializes in clothing and accessories for men, women, and children. Gaps 2009 fiscal year ended on January 29, 2010 and Gaps 2010 fiscal year ended on January 30, 2011. There are many factors that had a significant effect on the difference between Gaps financial numbers in fiscal 2009 versus fiscal 2010. When comparing Gaps Liquidity, it is important to understand why the company was more liquid in fiscal 2009 versus fiscal 2010. Consider Gaps Current Ratio being 2.19 times in fiscal 2009 and 1.87 in fiscal 2010. One reason that this happened is because there was a decrease in cash, cash equivalents, and short-term investments for Gap from fiscal years 2009-2010. These more than likely decreased because there was a 19.8% increase in treasury stock for fiscal year 2010 by using cash to buy back stock. There was also about 9.5% less cash flow from operating activities from fiscal years 2009-2010, which can have an effect on the current ratio as well. There were also more current liabilities in fiscal 2009 versus fiscal 2010. Current Assets decreased more than current liabilities did with this being another reason why the ratio decreased in fiscal 2010. Assets can be reduced by not only liabilities when paid but also when the company bought treasury stock. The inventory turnover decreased from fiscal years 2009-2010 as well. One reason is that the cost of goods sold increased around 3% in fiscal 2010 because of lower margins for Gaps regular and marked-down merchandise. Despite not being more liquid in fiscal 2010 versus fiscal 2009, Gap was more profitable in fiscal 2010 versus fiscal 2009. Gap had both higher net sales and net

Michael OHara Accounting 102-H Case Study for Gap, Inc. income in fiscal 2010 versus fiscal 2009. Net sales increased by about 9% from fiscal years 2009-2010. Net income increased by just over 3% from fiscal years 20092010. One reason Gap suggests that it had this increase was because in fiscal year 2010, Gap opened its market internationally online. This would allow for more transactions limited to not just stores and online sales in the United States, but other countries as well. There was a higher asset turnover in fiscal 2010 versus fiscal 2009 as well. Assets made more money off of sales than they had in the previous year. Average total assets decreased by 11.5% from fiscal years 2009-2010. The average total amount of assets for fiscal 2010 was less than fiscal 2009, however the net sales were higher in fiscal 2010 versus fiscal 2009 giving fiscal 2010 a higher asset turnover. Long Term Solvency was greater for Gap, Inc. in fiscal 2009 versus fiscal 2010. The debt to equity was greater in fiscal 2010 versus fiscal 2009. One reason this is the case is because there was a decrease in the stockholders equity. There was more treasury stock in fiscal 2010 to reduce stockholders equity than there was in fiscal 2009. Total stockholders equity decreased by nearly 17% from fiscal years 2009-2010. Even though the total liabilities decreased by about 6% from fiscal years 2009 to 2010, it did not decrease nearly as much as stockholders equity did causing there to be a higher debt-to equity ratio in fiscal 2010. Interest coverage ratio decreased for Gap as well. The Gap Inc. interest expense has been reduced by $15 million because there was a change in tax account methods. In fiscal 2010, there were fewer earnings before income taxes and interest to cover interest expenses to creditors.

Michael OHara Accounting 102-H Case Study for Gap, Inc. Cash Adequacy was higher in fiscal 2009 than fiscal 2010. There are a few reasons for this. For Cash flow to sales, net cash flows from operating activities were higher in fiscal 2009, but there was a lower net income in fiscal 2009. The net cash flows from operating activities were lower in fiscal 2010 by about 9.5%, but there was a higher net income in fiscal 2010. For Cash flow yield, net income by 9% was higher in fiscal 2010 versus fiscal 2009. When calculating the ratios, one can see that cash flow yield and cash flow to sales decreased from fiscal years 20092010. Another factor that can have an effect on this is the increase in inventory purchases from in fiscal 2010 compared to fiscal 2009. There was a higher 2009 fiscal bonus payout for the first quarter of fiscal 2010 versus a lower 2008 fiscal bonus payout for the first quarter of fiscal 2009. Market Strength was higher in fiscal year 2009 than fiscal 2010. Price/Earnings decreased from fiscal years 2009-2010. When the company buys treasury stock, it not only reduces the number of shares outstanding in the market, but it can also potentially increase the market price per share because there is less shares outstanding in the market. The earnings per share increased by almost 19% in fiscal 2010 because there was a higher net income that year versus fiscal 2009. Market price did not increase as much as earnings per share from the fiscal years 2009-2010 causing a decrease in Price/Earnings. The dividends yield was higher in fiscal 2010 versus fiscal 2009 because there was an increase in the annual dividends per share. Gap said that it plans to increase the dividends per share for the 2011 fiscal year as well. Gap may have increased its dividend per share because not only

Michael OHara Accounting 102-H Case Study for Gap, Inc. was the company more profitable in fiscal 2010, but also it could be seen as making up for the loss in investors confidence for Price/Earnings. Aside from Gap, Inc. expanding to an international online market, Gap made changes with its actual retail stores as well. Between Gaps fiscal years of 20092010, 32 retail stores closed. Gap, Inc. may have done this because of downsizing due to certain retail-stores not being profitable enough. If the stores are not making enough money, than it can cost Gap more to keep them operating than to downsize. Gap plans to close more company-operated stores than open for fiscal year 2011.