Final Exam Accounting This is an open book/open note assignment. For ratios, for full credit, you must use the formulas provided in your textbook. You may take as much time as you need between now and the due date. You are permitted to collaborate with other students currently enrolled in the course. However, each student must create and turn in their own unique solutions files. In other words, you are not permitted to share your excel files, solutions files, or pictures of either; each student must create their own. You may verbally compare your solutions and discuss the logic in how you arrived at your solutions with others in the course though.

Posted on the LMS are the fiscal year 2019 Form 10-Ks for Gap Inc. and Nordstrom Inc. Fiscal year 2019 reflects a 12 month period ending on February 1, 2020. This 12-month time period is referred to as fiscal year 2019, as most of the months occurred in 2019. The annual audited financial statements and footnotes can be found in Item 8 of the 10-K filings. Using the information provided in Item 8 of the 10-Ks to answer the questions below. Prepare your calculations on an excel spreadsheet, and transfer your final answers to a word document. Deliverable: Submit the two files, which include

(i) your spreadsheet with the supporting calculations and (ii) your word document with the final answers

1. For both companies, compute return on equity (ROE), return on assets (ROA), and return on financial leverage (ROFL) for the most recent year. For each company, interpret their ratios. Then comment on the relative performance of the two companies. Assume a marginal statutory tax rate of 30% for both companies. 2. Disaggregate the ROA's computed rate into profit margin (PM) and asset turnover (AT) components. For each company, interpret the PM and AT ratios. Then comment on the relative performance of the two companies, and how that relates to your comparison of ROA in question 1. Note: For Nordstrom, use the total revenues from line 3 of the income statement when calculating margins. 3. Profit Margin can be better understood by examining the expense ratios. Prepare common size income statement using vertical analysis for the most recent year for both companies. Using the vertical analysis, explain why the two companies have different profit margins in question 2. 4. Based on the reported values in the financial statements, compute the inventory turnover (INVT) for each company for fiscal year 2019. For each company, interpret their turnover ratios. Then comment on the relative performance of the two companies, and how that relates to your comparison of their ROAs in question 1.

5. Based on the reported values in the financial statements, compute property, plant and equipment turnover (PPET) for each company for fiscal year 2019, both with and without including the operating lease right-of-use assets. 1 Which measure do you think is more reflective of property, plant and equipment turnover and why? Then, based on the measure that you believe is more appropriate (i.e., either with our without leases), comment on the relative performance of the two companies, and how that relates to your comparison of their ROAs in question 1. 6. Evaluate liquidity and solvency. Compute each company's current ratio, quick ratio times interest earned ratio, and debt-to-equity ratio for the most recent year. Comment on how these companies compare on the liquidity and solvency. Do you have any concerns about either company's ability to meet its debt obligations? Note: Gap accounts receivable amount can be found in Note 2 listing the Other Current Assets. Also, Interest Income is shown in Gap's income statement with expenses as a negative value, a negative expense is really an addition to income. 1 Both companies adopted the new standard for accounting for leases in fiscal 2019, which resulted in operating lease right-of- use assets being recorded on the balance sheet beginning on February 1, 2020. Since the asset value of the operating lease assets at February 2, 2019 is not available (as it was not required to be included under GAAP until the following year), assume that it would have been the same value as recorded at February 1, 2020. While that is likely not the exact number, it is better than the zero that is currently included in the balance sheet at February 2, 2019.