Gap Inc.’s Sales, Cost of Goods Sold, and Gross Profit The consolidated balance sheets of Gap Inc. included merchandise inventory in the amount of

$1,796,000,000 as of February 3, 2007 (the end of fiscal year 2006) and $1,696,000,000 as of January 28, 2006 (the end of fiscal year 2005). Net sales were $15,943,000,000 and $16,023,000,000 at the end of fiscal years 2006 and 2005, respectively. Cost of goods sold and occupancy expenses were

$10,294,000,000 and $10,154,000,000 at the end of fiscal years 2006 and 2005, respectively.

Required 1. Unlike most other merchandisers, Gap Inc. doesn’t include accounts receivable on its balance sheet. Why doesn’t Gap Inc.’s balance sheet include this account?

2. Prepare the appropriate journal entry to record sales during the year ended February 3, 2007.

3. Gap Inc. sets forth net sales but not gross sales on its income statement. What type(s) of deduction(s) would be made from gross sales to arrive at the amount of net sales reported?

Why might the company decide not to report the amount(s) of the deduction(s) separately?

4. Reconstruct the cost of goods sold section of Gap Inc.’s 2006 income statement.

5. Calculate the gross profit ratios for Gap Inc. for 2006 and 2005 and comment on any change noted. Is the company’s performance improving? Explain. What factors might have caused the change in the gross profit ratio?