Abercrombie & Fitch Co.-Transactions and Financial Statements Abercrombie & Fitch Co., a Delaware corporation, is principally engaged in the purchase, distribution and sale of men's, women's and kids' casual apparel. The Company's retail activities are conducted under the Abercrombie & Fitch and "Abercrombie" trade names through retail stores and a magazine/catalogue bearing the Company name. Merchandise is targeted to appeal to customers in specialty markets who have distinctive consumer characteristics. Learning Objectives Record basic transactions, adjusting journal entries, and closing entries. Prepare a balance sheet and income statement. Refer to the fiscal year 1999 financial statements of Abercrombie & Fitch Co. Note: "Fiscal year 1999" refers to the year that began on February 1, 1998 and ended on January 30, 1999. Process a. Open T-accounts for each balance sheet and income statement line item (i.c., for the permanent accounts: 9 asset T-accounts and 9 liability and owners' equity T-accounts; for the temporary accounts: 5 T-accounts). Enter the January 31, 1998 balance sheet amounts as the opening balance for fiscal 1999 and post the following fiscal 1999 transactions (figures in thousands of dollars): 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Inventory costing $481,918 was purchased on account during the year. Store Supplies costing $1,000 were purchased on account during the year. Sales of $815,804 were made. Of these, $15,804 were on account. J The cost of merchandise sold was $465,000. The company collected cash of $13,398 from its customers for sales previously recorded as accounts receivable. Cash of $514,114 was used to pay suppliers for goods, supplies, and property and equipment previously purchased on account. The company collected $23,785 from the Limited in satisfaction of amounts owed by the Limited to A&F. Cash of $50,000 was used to repay principal on long-term debt. Property and equipment were acquired on account (accounts payable) for $39,987. The company paid $908 for shares of its own common stock. This is known as treasury stock. It is recorded at cost as a debit in the owners' equity section of the balance sheet. The following represents a single composite journal entry for all remaining transactions during the year. Record the entry in the appropriate accounts: Other Current Assets General, Admin., and Store Operating Expense Deferred Income Taxes Dr. Dr. Dr. Provision for Income Taxes (Expense) Dr. Dr. Other assets Cr. Cash Cr. Cr. Cr. Income Taxes Payable Other Long-Term Liabilities Interest Income Accrued Expenses Common Stock Paid-in Capital TOTAL i 400 150,652 68,040 6,978 631 151,264 17,736 3,327 3,144 25,054 6 26,170 226.701 226,701 Explanation: to record all other activity for fiscal 1999 b. Prepare an unadjusted trial balance as at January 30, 1999 using the ending balances in the T-accounts obtained in part a. Abercrombie & Fitch Co. Transactions and Financial Statements Copyright 2001 by Prentice Hall, Inc. All rights reserved. No part of this publication may be reproduced in any form for any purpose without the written permission of the publisher. c. Prepare 1999 adjusting journal entries for the following items and post them to the T-accounts prepared in part a. 12a. Abercrombie & Fitch employees counted the company's merchandise inventory on January 30, 1999. The cost of inventory in stock on that day was $43,992. 12b. Abercrombie & Fitch employees counted the company's store supplies on January 30, 1999. The cost of store supplies on that day was $5,887 (store supplies used are included in store operating expenses). 12c. Assume that all of the activity in the "Other current assets" account is related to the company's insurance policies. The unadjusted amount in "Other current assets" (Hint: $1,696) represents the beginning balance for prepaid insurance premiums plus all cash payments for insurance during the year. At January 30, 1999, the amount of insurance that had not expired was $691. 12d. The company recorded $20,946 of depreciation part of general, administrative, and store operating expenses-on the property and equipment. 12e. Abercrombie and Fitch employees' last payday was January 21st. At year-end there were 10 days of wages that had not been recorded. This amounted to $3,685 including all related payroll taxes. d. Prepare an adjusted trial balance as at January 30, 1999 using the ending balances in the T-accounts obtained after recording the adjustments listed in part c. e. Prepare the fiscal 1999 income statement. f. Close the temporary T-accounts and provide the fiscal 1999 closing entry. g. Prepare the January 30, 1999 balance sheet. Analysis h. Calculate the year-over-year percentage change in Net Sales for fiscal 1998 and 1999. Comment on this trend. i. Comment on the level of inventory in 1999 compared to 1998 and 1997. (Inventory in 1997 was $34,943 and total assets were $105,761.) What conclusions do you draw from this trend? j. What additional information might an investor in Abercrombie & Fitch seek in order to evaluate the company's future level of profitability? Abercrombie & Fitch Co. Transactions and Financial Statements ABERCROMBIE & FITCH CO. CONSOLIDATED BALANCE SHEETS (Thousands) ASSETS CURRENT ASSETS: Cash and Equivalents Accounts Receivable Inventories Store Supplies Receivable from The Limited Other current assets TOTAL CURRENT ASSETS PROPERTY AND EQUIPMENT, NET DEFERRED INCOME TAXES OTHER ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable. Accrued Expenses Income Taxes Payable TOTAL CURRENT LIABILITIES LONG-TERM DEBT OTHER LONG-TERM LIABILITIES SHAREHOLDERS' EQUITY: Common Stock Paid-In Capital Retained Earnings (Deficit) Less: Treasury Stock, at Average Cost TOTAL SHAREHOLDERS' EQUITY TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY January 30, 1999 January 31, 1998 ? $42,667 1,695 33,927 5,592 23,785 1,296 108, 962 70,517 -3,759 $183,238 $15,968 35,143 15,851 66,962 50,000 7,501 511 117,972 (58,931) 59,552 (777) 58,775 $183, 238 The accompanying Notes are an integral part of these Consolidated Financial Statements. crombie & Fitch Co. Transactions and Financial Statements ABERCROMBIE & FITCH CO. CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts) NET SALES Costs of Goods Sold, Occupancy and Buying Costs GROSS INCOME General, Administrative and Store Operating Expenses 1999 1998 1997 $521, 617 $335, 372 320,537 211, 606 201,080 123,766 116,955 77,773 OPERATING INCOME 84,125 45,993 Interest (Income)/Expense, Net 3,583 4,919 INCOME BEFORE INCOME TAXES 80,542 41,074 Provision for Income Taxes 32,220 16,400 NET INCOME ? $48,322 $24,674 ==== The accompanying Notes are an integral part of these Consolidated Financial Statements. Abercrombie & Fitch Go-Transactions and Financial Statements