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Note to the user: This Word document provides a structured template for preparing your responses to the questions in the annual report project. If you did not purchase the workbook you are not permitted to use this template. INTRODUCTION TO THE CORPORATE ANNUAL REPORT: A Business Application with IFRS Content 4th edition Copyright 2015 by Applied Accounting Analytics. All rights reserved. Reproduction or translation of this book beyond that permitted by the applicable copyright law without Applied Accounting Analytics' permission is prohibited. To be completed by the student and submitted with the completed annual report project according to your instructor's requirements. Complete the following before you submit your assignment. This step is required to validate your compliance with sections 107 or 108 of the 1976 United States Copyright Act. 1. Remove the front cover of the workbook and identify: Student Name: Dorean Williams Term: Fall Selected Company: GAP, INC. Instructor: Dr. Judith Harris 2. Print out your completed electronic template. 3. Attach the following: This front cover (completed) Electronic solution template Printed reports as specified by the instructions that immediately follow Chapter 1: Select a Company and Gather Documents - Question 1 CHAPTER 1 - INTRODUCTION Select a Company and Gather Documents Chapter 1: Select a Company and Gather DocumentsQuestion 1 Identify with an \"X\" the primary source of data for this project. Example for The Home Depot 2013 Annual Report: Click here to enter Annual report to shareholders text. X Click here to enter text. http://www.homedepotar.com/ Annual report to shareholders with a letter from Chief Executive Officer and SEC Form 10-K as part of the annual report to shareholders. SEC Form 10-K and the company website. Fill in the page numbers from the annual report where the following are located. Required information for this workbook project. Financial Highlights Page No. WEB Management's Discussion and Analysis (MD&A) 18-31 Income Statement 35-36 Balance Sheet 34 Statement of Change in Stockholder's Equity 37 Statement of Cash Flows 38 Required information for this workbook project. Chief Executive Officer Letter Notes to Financial Statements Report of Independent Accountants or Independent Auditors' Report Page No. (no page number) SHEET 2-3 39-67 33 Five- or Ten-Year Summary of Operating Results 16-17 Management's Report (Responsibility) on Internal Control over Financial Reporting 68 Investor and Company Information or Shareholder Information WEB Identify Why You Selected This Company Chapter 1: Identify Why You Selected This Company - Question 1 A) What is/are your motivation(s) or interest(s) in selecting this company? [See above for examples.] B) What question(s) are you seeking to answer? [For example, is the company profitable? Can the company change and develop new products and services to be competitive? Would I invest in this company? Will the company provide rewarding career opportunities? In chapter 5 you will have pulled together the financial and nonfinancial information to answer these question(s).] A) Apart from the company (GAP Inc.) being selected by my Professor; I would like to learn about the company's long-term financial position and success compared to competitors such as Zara, Forever 21 and H&M. I have monies saved over many years and taking into consideration my long-term financial goals such as a retirement fund and is considering whether GAP Inc. have diversity of commodities. It is my view that this company is a very lucrative company and will reduce the risk of me losing all my money at one point in time. Gap Inc. also has a good market with outlets in majority of the Countries hence increasing their marketability. B) Whether GAP Inc. is profitable or not? What is liquidity position of GAP Inc.? What is solvency position of Company? What is future of Company? Whether my investment will be safe and profitable or not? Whether GAP Inc. is keeping up with the latest trends making them competitive? Company and Annual Report Essentials Chapter 1: Company and Annual Report Essentials - Question 1 What is the company's complete name? THE GAP, INC. Chapter 1: Company and Annual Report Essentials - Question 2 What is the address of your company's corporate headquarters? Two Folsom Street, San Francisco, CA., 94105 Chapter 1: Company and Annual Report Essentials - Question 3 Identify the company's website address. www.gapinc.com Chapter 1: Company and Annual Report Essentials - Question 4 Identify the telephone number and e-mail address of the company's Investor Relations Department. Company's Investor Relations Department number 415-427-0100 investor_relations@gap.com Chapter 1: Company and Annual Report Essentials - Question 5 Which stock exchange lists your company? The New York Stock Exchange Chapter 1: Company and Annual Report Essentials - Question 6 What is your company's stock exchange trading symbol? \"NYSE:GPS\" Chapter 1: Company and Annual Report Essentials - Question 7 What is your company's Standard Industrial Classification (SIC) and sector? Run a search on \"Standard Industrial Classification,\" and the classification and code will be identified. Your company may list more than one SIC code numbers. The first listed is considered the primary SIC for the company. For example, search - The Home Depot SIC - brings up a listing of sources. Once you locate this code, search on the Department of Labor website at https://www.osha.gov/pls/imis/sicsearch.html to find out more about your Company's SIC. SIC Code: 5211 Sector: Basic Materials, Construction, Retail Industry: Lumber and other building materials SIC Code: 5651 Sector: Clothing, Apparel, Multiple Product Lines and Employment Industry: Apparel & Accessories, Retail, Department Stores and Superstores Chapter 1: Company and Annual Report Essentials - Question 8 Locate the board of directors listing. How many board members does your company have? The company has 10 (Ten) board members Chapter 1: Company and Annual Report Essentials - Question 9 How many of the directors are company employees, labeled inside directors? And how many are non-company directors, labeled outside directors? Why does a company want and need outside directors? (Inside and outside directors are typically identified as such by their title and company.) 1(One) director is company employee 9 (Nine) Are outside directors A company needs outside directors to minimize the risk of conflict of interests and obtain different perspectives (because they are on the outside looking in they would have a bigger picture of the market and view it differently than the insiders). Outside directors also would have unbiased opinions. Chapter 1: Company and Annual Report Essentials - Question 10 Leadership addresses the stockholders, typically, once a year at the annual stockholders meeting. Identify where and when this occurred, as reported in your annual report. Two Folsom Street, San Francisco, CA., 94105 (Gap Inc. Headquarters) May 20th, 2014 The previous series of questions provides basic company information. All are building blocks of a complete study of a company through the annual report. Company Strategy and Business Environment Chapter 1: Company Strategy and Business Environment - Question 1 Review the chairman's message of your company's annual report. Does it appear to be uplifting or somewhat apologetic? Identify phrases that support your position. The Chairman's message seems to be very uplifting because he provides details of the performance of GAP Inc. and areas that needs improvements such as product development. He also praises the employees for the success of GAP Inc. and seek initiatives to retain and motivate the staff. He envisioned growth and a very successful company going forward. This was obvious from his statement \"I am confident that our best days are ahead of us.\" Chapter 1: Company Strategy and Business Environment - Question 2 Check below the one primary company strategy identified in the chairman's message. Support your answer with phrases found in the chairman's message that pointed you to the identified corporate strategy. Growth: Vertical Click here to enter text. Horizontal___X Concentric Click here to enter text. Conglomerate Click here to enter text. Stability Click here to enter text. Retrenchment Click here to enter text. . Phrases to support your conclusion: Primary company strategy is Horizontal Growth. It is pointed out by the phrase \"Around the world, we continue to make progress with our long-term global growth strategy in 2014, adding almost 40 new stores in greater China, including seven Old Navy stores and Gap's 100 th store in this region. In the U.S. Athleta grew its footprint to just over 100 stores, with plans to open 20 more this coming year. It's my intent to pursue growth, where appropriate, through all of our brands, but most importantly, through Old Navy's ongoing expansion\" Chapter 1: Company Strategy and Business Environment - Question 3 Briefly summarize the company's discussion found in Item 1 of SEC Form 10-K. Type of business: GAP Inc. is a leading global apparel retail company. They operates stores in US, Canada, UK, France, Ireland, Japan, Italy, China, Hong Kong and Taiwan. There is also on-line stores. Major business segments: Gap includes apparel and accessories for men and women. Gap Kids, BabyGap, GapMaternity,GapBody and GapFit collections Primary customers: The company's customers are from the general public Primary products and/or services: Apparel, handbags, shoes, jewelry, personal care products, eyewear for men and women Other: All sales to customers are tendered on cash, credit cards, debit cards, or personal checks Chapter 1: Company Strategy and Business Environment - Question 4 Identify broad-based social, political, economic, and technological concerns that may affect your company. Put N/A if one of the categories does not apply. Social: We must successfully gauge apparel trends and changing consumer preferences to succeed. Political: Environmental laws and government regulations of countries in which company is operating may affect Company's operations. Economic: Global economic conditions and impact on customer spending pattern could adversely affect company's result of operations. Technological: Updates or changes to IT system may disrupt company's operations. Other: The global apparel retail industry is highly competitive. The franchisees compete with local, national, and global department stores, specialty and discount store chains, independent retail stores, and online businesses that market similar lines of merchandise. Wrap-up Chapter 1: Wrap-up - Question 1 After further review of additional information you should now be confident in identifying the one primary company strategy, beyond the insight provided by the chairman's message? Check below the one primary company strategy identified in the chairman's message and all other supporting documents. Support your answer with phrases. Growth: Vertical Click here to enter text. Horizontal X Concentric Click here to enter text. Conglomerate Click here to enter text. Stability X Retrenchment Click here to enter text. . Phrases to support your conclusion from information gathered from the chairman's message, Item 1 of the SEC Form 10-K and other insight gained from completing Chapter 1. The company is confident in further growth in the future. This is evident from chairman letter \"and make rapid progress to improve the acceptance and consistency of our product.\" \"To remain competitive in the apparel retail industry, we must attract, develop, and retain skilled employees in our design, merchandising, marketing, and other functions.\" \"Our success is dependent to a significant degree on the continued contributions of key employees.\" CHAPTER 2 - ANNUAL REPORT STRUCTURE Financial Highlights Chapter 2: Financial Highlights - Question 1 Review the financial highlights of your company's annual report to the shareholders. Identify net sales or revenues, net income, basic earnings per share (BEPS), and total assets for the current and preceding years. These are the most common values included in financial highlights. If your company reports something different, simply cross out an item here and recap what is reported. SEC Form 10-K does not provide financial highlights. You may find this information on the company website. If not available put N/A in the first row of boxes. Current Year One Year Prior Categories Net sales or revenues Two Years Prior $16,435 $16,148 $15,651 Net income $1,262 $1,280 $1,135 Basic EPS $2.90 $2.78 $2.35 $7,690 $7,849 $7,460 Total Assets Based on your preliminary review, is your company performing better than, equal to, or less favorably than in the prior year? Briefly explain. On the basis of preliminary review overall GAP Inc. has shown a tremendous improvement from two years prior but a slight decrease from the prior year in all areas except the Basic EPS which increased significantly from prior years. The numbers in GAP Inc. income statement certainly show a very positive trend. This is evident when net sales for fiscal 2014 increased approximately 2 percent to 16, 435 million compared with $16,148 million for fiscal year 2013. Also Net Income showed a slight decrease from $1,280 million in fiscal year 2013 to $1,262 million in 2014 but is an increase from $1,135 million in 2012. The basic EPS of company is also increasing year to year. General Company and Marketing Information Chapter 2: General Company and Marketing Information - Question 1 Look for pictures of product and people that are colorful and send a positive company signal to the reader. Category Message Example: Volunteer Activities Ongoing and contributing to the success of the community Employee relation programs Company focuses on employee's volunteerism. Research and development success Company listens customers around the world and share their expectations Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. What is the broader message from this information? The company realizes and implements employee's welfare and tries to retain key employees. The company focuses on customers' tastes, needs and likings and produces its products as per customers' preferences. Management's Discussion and Analysis Chapter 2: Management's Discussion and Analysis - Question 1 Results of Operations: Identify the primary drivers/issues that explain current and future results of operations discussed in the MD&A. For example, the gross profit percentage increased because of improved buyer/supplier relations resulting in greater overall operating performance. Or an increase in operating expenses because of increased fuel costs reduced profits. List the six major drivers/issues of performance you find in the MD&A section of the annual report. 1.Net sales for fiscal 2014 increase 2% to $16.4 billion 2.Gross Margin for fiscal 2014 was 38.3% 3.Operating Margin for fiscal 2014 was 12.7% 4.Net income was $1.3 billion 5.Diluted EPS increased 5% to $2.87 6.Generated healthy free cash flow of $1.4 billion Liquidity: Recap what you find about your company's liquidity in the MD&A section of the annual report. Look for information about the ability of the company to satisfy short-term cash needs and the ability to generate operating cash flows, for example. GAP Inc. largest source of cash flows is cash collection from sales of merchandise. The company believes that current cash balances and cash flows from operations will be sufficient to support company's business operations including growth initiatives and planned capital expenditures for the next 12 months and beyond. Capital Resources: Recap what you find about your company's capital resources in the MD&A section of the annual report. Look for information about cash reserves and credit availability. For example, your company's MD&A section may have a disclosure about an established line of credit to fund future growth. The company is also able to supplement near term liquidity if necessary with its $500 million revolving credit facility. Reports by Management Chapter 2: Reports by Management - Question 1 Review the Management's Report (Responsibility) on Internal Control over Financial Reporting in your company's annual report. Answer the following questions. Who is responsible for maintaining the internal controls designed to provide reasonable assurance that the books and records reflect the transactions of the company? It is the responsibility of management to maintain the internal controls designed to provide reasonable assurance that the books and records reflect the transactions of company. Record the statement that identifies management's conclusion about internal controls. Based on the assessment management concluded that as of January 31, 2015, our internal control over financial reporting is effective. Who audited management's The company's internal control has assessment of the effectiveness of your been audited by Deloitte and Touche company's internal control over financial LLp., an independent registered public reporting? accountant firm. Independent Auditors' Report Chapter 2: Independent Auditors' Report - Question 1 Review the Independent Auditors' Report of your company's annual report and answer the following questions. Who was the company's auditor and where is it located? Deloitte & Touche LLP. San Francisco California What is the responsibility of the auditor? Whether the financial statements are free of any material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Who is responsible for the preparation of and information within the company's financial statement? These financial statements are the responsibility of the Company's Management. The audit was conducted in accordance with what? Standards of Public Company Accounting Oversight Board United States. What was the opinion of the auditor? In the auditor's opinion, \"The consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Gap Inc., and subsidiaries as of January 31, 2015 and February 1, 2014, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 2015, in conformity with Generally Accepted Accounting Principles in the United States of America. Also, the company maintained, in all respects, effective internal control over financial reporting as of January 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) Five- or Ten-Year Summary of Operating Results Chapter 2: Five- or Ten-Year Summary of Operating Results - Question 1 Identify the major components provided in the five- or ten-year summary. Summarize the insight provided by each. Look for stable, increasing or decreasing trends. Consistent, slightly improving performance signals management has control of the business. Inconsistent performance signals management does not have control of the business. Component Summary of Insight Example: The Home Depot Sales and earnings have grown significantly over time. Operating expenses are decreasing. Net Sales Net Sales are Increasing Gross Margin Gross Margin is almost stable Operating margin Operating Margin is almost stable Net Income Net Income is Increasing Basic EPS Basic EPS is Increasing Cash Dividend paid Cash Dividend Paid Increasing CHAPTER 3 - FINANCIAL STATEMENTS The Balance Sheet Chapter 3: Balance Sheet - Question 1 Identify the date shown at the top of your selected company's balance sheet. Current Year Prior Year January 31, 2015 February 1, 2014 Does the company's fiscal year follow the calendar year? Yes, No No If not, why do you think it is different? No the company does not follow the calendar year, because the company follows fiscal year of 52 weeks every year and calendar year starts from 1 st January and ends on 31st December each year. Chapter 3: Balance Sheet - Question 2 Review the current asset section of your selected company's balance sheet. Explain why the order of individual items begins with cash. In your opinion, would it be more or less appropriate to order these items according to dollar magnitude? Explain. It would be less appropriate to order the current assets according to dollar magnitude since current assets show a company liquidity. Hence, current assets should be ordered as the liquidity decreases, because cash is the most liquid asset, it is always at the top of the current assets. This is in accordance with US GAAP. Chapter 3: Balance Sheet - Question 3 Review your company's balance sheet (or SEC Form 10-K) and compare accumulated depreciation to the historical cost of Plant and Equipment (PE) using the following ratio. Compute the following: Percentage of Asset Life Remaining Accumulated depreciation / High percentage means older assets Plant and Equipment Low percentage means newer assets Acc. Dep./Plant & Equipment 5532/8305 = 0.67 67% Is the investment in fixed assets, on average, relatively recent? If not, can we assume that these assets will be replaced shortly? With a ratio of 0.67 (67% percentage of Asset Life Remaining) indicates that assets are old because percentage is on higher side and we can assume that these assets will be replaced shortly. Chapter 3: Balance Sheet - Question 4 Since property, plant, and equipment (PPE) and long-term investments in stock represent a company's investment, why do we distinguish between them in the balance sheet? U.S Security and Exchange Commission guidelines and GAAP require that a business separates investment items from PPE. Long-term stock investments lack physical resources unlike PPE. Depreciation is not recorded on long term stock investment but PPE is depreciated and recorded in a general ledger. Chapter 3: Balance Sheet - Question 5 Review the noncurrent asset section of your company's balance sheet. Are any intangible assets listed? If so, identify the types of intangible assets and the percent of total assets that the intangible assets represent. Intangible Asset 1: Goodwill is 65% Intangible Asset 2: Trade Name is 33% Intangible Asset 3: Other Indefinite lived intangible assets are 2% Total Intangible Assets Total Assets = 278/7690 = 3.62% If this company were to be acquired by another company, would the intangible assets influence the purchase price? Explain your answer. If the company purchase another company intangible assets it does influence purchase price because while calculating exchange rate of stock, intangible assets does not form part of assets. Chapter 3: Balance Sheet - Question 6 Now review your company's total assets for the most recent year. What percentage of total assets is current? Noncurrent? Current Noncurrent 56.14% 43.86% Should companies have a greater investment in current assets or noncurrent assets, or does it depend on the nature of their business? Explain your answer. The investment in current and noncurrent assets depend on the nature of business for example if a business sector is service oriented it will have a lower percentage of noncurrent assets. However, a manufacturing company has a higher percentage of noncurrent assets because of the cost of heavy plant and equipment. Chapter 3: Balance Sheet - Question 7 Review your company's balance sheet. Does it report a deferred tax asset? A deferred tax liability? If so, are the deferred tax assets and/or liabilities reported as current or noncurrent? Deferred tax asset? Yes or No Yes Current or Noncurrent* Noncurrent Deferred tax liability? Yes or No Yes Current or Noncurrent* Noncurrent *Note: If your company reports a current deferred tax asset (liability), it will realize an income tax benefit (obligation) in the next accounting period because of a previously reported event. If your company reports a noncurrent deferred tax asset (liability), it will realize an income tax benefit (obligation) in future accounting periods (beyond the next) because of a previously reported event. Chapter 3: Balance Sheet - Question 8 Identify the information that relates to the stockholders' equity section of your company's balance sheet. Par value per share of common stock? Number of common shares authorized? $0.05 2,300m Number of common shares issued? 1,527m Number of common shares outstanding? 867m Number of treasury shares held by the company? 0 Chapter 3: Balance Sheet - Question 9 Answer the following questions relative to the stockholders' equity section of the balance sheet. By what amount did retained earnings increase or decrease from the prior year? Decrease from the prior year by $11,421m Was the increase or decrease in retained earnings equal to the company's current year net income or net loss? No *If No, then dividends were paid (or declared) by your selected company or certain events took place during the year where the accounting for the events directly affected the retained earnings account. Chapter 3: Balance Sheet - Question 10 List (write-in) each financial statement element as shown in your company's balance sheet. Current Assets Current Liabilities Stockholders' Equity Cash and cash equivalents Current maturities of debts Common stock Merchandise Inventory Accounts Payable Additional Paid in Capital Other Current Assets Accrued expenses and Other Current Liabilities Retained Earnings Property and Equipment Income Taxes Payable Accumulated and other Comprehensive Income Other long term assets Long Term Debts Treasury stock at cost Lease incentives and other long term liabilities Click here to enter text. Click here to enter text. Chapter 3: Balance Sheet - Question 11 Identify the combined carrying values (dollar amounts) of the following selected account groups taken from your company's balance sheet: Account Groups Current Prior Year Increase or Decrease (in dollars) Year Current Assets 4,317 4,430 -113 Net Fixed Assets 3,373 3,419 -46 600 661 -61 Current Liabilities 2,234 2,445 -211 Long-term Liabilities 2,473 2,342 131 21 55 -34 0 2,899 -2,899 2,797 14,218 -11,421 165 -14,110 -13,945 Intangible and Other Noncurrent Assets Common Stock Additional Paid in Capital* Retained Earnings Other Equity Components *Note again that additional paid in capital is known as share premium in IFRS based financial statements. Chapter 3: Balance Sheet - Question 12 Identify the three major balance sheet accounts, for example accounts receivable, accounts payable, inventory, etc. that changed the most from the prior year. What events might explain these changes? Working to explain why these changes occurred contributes to a greater understanding about a company. Account Explanation Example: Example: Account Receivable An increase in accounts receivable should coincide with an increase in sales, i.e., a 10% increase in sales would explain a 10% increase in accounts receivable. If accounts receivable are increasing and sales decreasing, the signal is unfavorable. Long-term debt GAP Inc. increase lease incentives and other long-term liabilities by 17% from 973 in 2014 to 1,141 in 2015, the company invested in purchasing of tangible or intangible assets. Retain earning Retained earnings decrease 80% from 14,218 in 2014 to 2,797 in 2015, treasury stock may decrease retained earnings. For example, when the treasury stocks are resold to investors below their cost, retained earnings may have been reduced to absorb the loss. Accounts Payable GAP Inc. accounts payable account decreased it is safe to assume that the company paid some of its bills resulting in their cash account decreasing. Chapter 3: Balance Sheet - Question 13 Prepare a common-sized balance sheet (expressed in percentages) using the following account groups shown in your selected company's balance sheet. Account Group Current Year Prior Year Increase or Decrease (current year percent minus prior year percent) Current Assets 56.14% 56.44% -0.30% Net Fixed Assets 36.06% 35.14% 0.92% Intangible and Other Noncurrent Assets 7.80% 8.42% -0.62% Total Assets 100% 100% Current Liabilities 29.05% 43.89% -14.84% Long-term Liabilities 32.16% 29.84% 2.32% Common Stock 0.27% 0.70% -0.43% Additional Paid in Capital 0.00% 36.93% -36.93% 36.37% 181.14% -144.77% 2.15% 179.88% -177.74% 100.00% 100.00% 0.00% Retained Earnings Other Equity Components Total Liabilities and Stockholders' Equity Chapter 3: Balance Sheet - Question 14 Identify the three balance sheet groups from question 13 above that changed most significantly. Within each of these groups, identify the primary balance sheet element that drove this change. What events might explain these changes? Group Name: Explanation: Current Assets (Example - sales increased by 22%, thus accounts receivable increased by approximately 22%) Long Term Liabilities Increased by 2.32% as reduction in treasury stock Common stock Decreased by .43% as reduction in treasury stock Other equity components Reduction in treasury stock Chapter 3: Balance Sheet - Question 15 Did your company become more or less liquid when comparing this year to last year? Current Year: Prior Year: Current Assets minus Current Liabilities Current Assets minus Current = Liabilities = Current Assets - CL = 2,083 CA-CL = 1,985 Explain why? The company has become more liquid as it has a higher amount of working capital in 2015 when compared to 2014. Chapter 3: Balance Sheet - Question 16 Did your company increase or decrease its financial leverage when comparing total debt to total stockholders' equity from this year to last? Current Year: Prior Year: Total debt Total stockholders' equity Total debt Total stockholders' equity 1.56 1.58 Explain why: GAP Inc. financial leverage has decreased during 2015 as compared to that of the previous years, because the ratio increased we can assume they are being financed by creditors rather than from its own financial sources which may have a negative effect. Lenders and investors prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline. This may also suggest that the company may not be able to generate enough cash to satisfy its debt obligations. The Income Statement or Statement of Earnings Chapter 3: Income Statement - Question 1 Review the heading of your company's income statement. Does the company's income statement provide two or three years of comparative information? (Insert number to the right.) 3 ___ yrs. Why do you think the SEC requires that balance sheets provide two years of comparative financial information and income statements provide three years of comparative financial information? SEC requires that Balance sheet provide two years of comparative financial information to compare changes in financial position by providing the reader with a series of snapshots of the company's financial condition over time, this is useful for developing trend line analysis. The income statement however provides three years of comparative financial information to determine the trends of the revenues and sales and offers a more comprehensive picture of the company's financial position throughout the course of the year. It shows how a business generate revenue and incur expenses through operating and non-operating activities. Analyzing three years of information is more beneficial for spotting trends and company performance over time. Chapter 3: Income Statement - Question 2 Review the middle section of your company's income statement. Did operating income (loss) increase or decrease from the prior year and by how much? You may have to compute operating income (loss). Increased by $ 207m in 2013 Decreased by $ 66m in 2014 Chapter 3: Income Statement - Question 3 Does the middle section of your company's income statement show a nonoperating income (loss) increase or decrease from the prior year and by how much? You may have to compute non-operating income (loss). Increase by $ 14m Decrease by $ 26m Chapter 3: Income Statement - Question 4 In reference to why you are studying this company, is it important to know the different sources of incomeoperating or non-operating? It is important to know sources of operating income and non-operating income because operating income is the primary source of revenue and it has a recurring nature whereas non-operating income is non-recurring. Operating income are related to the day-to-day operations of the business and indicates a business day-to-day performance and financial health. Chapter 3: Income Statement - Question 5 If any of the irregular events are shown on your company's income statement, describe the nature and the amount. Select the most current year affected by the event if multiple years are affected. Irregular Event Amount Nature of the Change Restructuring charge? Click There is no irregular event here to enter text. Discontinued operation? Click There is no irregular event here to enter text. Extraordinary event? Click There is no irregular event here to enter text. Chapter 3: Income Statement - Question 6 Review the lower section of your selected company's income statement. Did net income (loss) increase or decrease from the prior year and by how much? Increased by $ 145m Decreased by $ 18m Chapter 3: Income Statement - Question 7 Prepare a common-sized income statement for the categories below. Account/Category Current Year Prior Year Increase or Decrease (current year percent minus prior year percent) Net Sales (revenues) 100% 100% Cost of Goods/Services (if applicable) 65.73% 61.03% 4.70% Gross Profit 40.75% 38.97% 1.77% Operating Expenses 27.25% 25.66% 1.59% Operating Income (Loss) 13.50% 13.31% 0.19% Non-operating Income (Loss) 0.45% 0.35% 0.11% Income Tax Expense 4.87% 5.03% -0.17% Net Income 8.18% 7.93% 0.25% Chapter 3: Income Statement - Question 8 Identify the three income statement accounts/categories that changed the most in Question 7. What events might explain these changes? Account or Category: Explanation: (Hint - the MD&A section will provide good information to answer this question.) Operating Expenses Due to increase in employee cost Operating Income (Loss) Due to increase in cost of goods Net Income Due to rise in price level Chapter 3: Income Statement - Question 9 Identify your company's Basic and Diluted EPS amounts. Place a N/A in Diluted EPS if not reported. Basic EPS Diluted EPS Current year 2.9 2.87 Preceding year 1 2.78 2.74 Preceding year 2 2.35 2.33 Why is diluted EPS always equal to or less than basic EPS? Diluted EPS is always equal to or less than basic EPS, because EPS is equal to earning divided by shares and utilizes the shares that are actually issued or current shares. Diluted EPS however utilizes the shares a company could potentially issue if current shares and other sources of dilution they are taken into consideration. Statement of Cash Flows (SCF) Chapter 3: SCF - Question 1 Is the SCF dated in the title for a period of time similar to the income statement or for a point in time similar to the balance sheet? Why? The SCF is dated in the title for a period of time similar to Income Statement because they are highly related. The income statement shows revenues generated and expenses incurred. Similarly, the cash flows show activities during the accounting period that affect cash impacted by operations. Chapter 3: SCF - Question 2 Identify the following sections of the SCF and record the amounts. Check the math by summing to the cash balance at end of year. Verify that the ending cash balance reported on the SCF is the same as reported on the balance sheet. Section Current Year Prior Year Second Prior Year Net operating cash flows 2,129 1,705 1,936 Net investing cash flows -596 -624 -844 Net financing cash flows -1,507 -1,004 -1,481 5 20 -425 Cash balance at beginning of year 1,510 1,460 1,885 Cash balance at end of year 1,515 1,510 1,460 Net increase (decrease) in cash flows Does the total match balance sheet cash? Yes / No Yes Yes / No Yes Chapter 3: SCF - Question 3 Record net sales, net income and net operating cash flows below. All three should be trending in approximately the same direction. If so, this is a sign of a well-run business. If one or more are going in a different direction, or random, then you must keep an eye open for an explanation why. Item Net Sales Current Year Prior Year Second Prior Year 16,435 16,148 15,651 Net Income 1,262 1,280 1,135 Net Operating Cash Flows 2,129 1,705 1,936 Explain why net sales, net income and net operating cash flows are trending together or differently. (Hint: Look at depreciation expense and substantial changes in inventory, accounts receivable and accounts payable balances. Explaining why is a key learning point.) GAP Inc. net sales, net income and net operating cash flows seem to be trending together with increases in 2014 when compared to prior years, with a slight decrease in Net Income from 1280 in 2013 to 1262 in 2014 this can be a result of increased depreciation. Inventory also experiences significant changes across the three years, increasing from (143) in 2012 to (193) in 2013 however decreasing to (9) in 2014. Accounts payable increase from 91 in 2012 to 105 in 2013 but showed a decrease in 2014 to (41). Chapter 3: SCF - Question 4 Identify the primary cash outflows and inflows from investing activities. Description of Activity Amount Cash outflow: $714m Cash inflow: $121m Consider three key issues at this point. Is the company adding assets? This is a sign of growth. Is the company replacing assets? This is a sign of growth and stability. Is the company only selling assets? This is a sign of retrenchment. The cash outflows and inflows reported by GAP Inc. reveals the company is growing it business by increasing its assets and increasing the amount of plant and equipment. This also corresponds to the company's horizontal growth strategy to expand into other geographic regions in this case by continuing to acquire and operate in other locations. Chapter 3: SCF - Question 5 Identify the primary cash inflow and outflow from financing activities. Description of Activity Amount Cash inflow: 38m Cash outflow: (Note: cash dividends paid are reported here.) 383 Consider two key issues at this point. How is the company being financed, through debt or equity? Can you determine which is growing faster and why? A sound corporate strategy is to finance a company with debt during stable times, because this demands regular payment of principal and interest, and to finance a company with equity during unstable times, because leadership can elect to pay or not pay dividends. Yes it is giving reasonable returns considering the current market conditions. The company has paid dividends and it is almost at par of average dividend yield of 2%. The Statement of Stockholders' Equity (SSE) Chapter 3: SSE - Question 1 Identify the elements that comprise the statement of stockholders' equity section of your company. Hint: These items are generally illustrated across the top of the page using a columnar format. (Example. Common stock - shares and dollar amount.) Common Stock, Retained Earnings and Accumulated Other Comprehensive Income. Chapter 3: SSE - Question 2 Identify the cash dividends per share. 0.88 Determine the dividend payout percentage. A company's dividend payout percentage is computed by dividing dividend per common share by net income or earnings per common share. (Hint: If your company reported a net loss for the year, the answer lacks meaning.) 30.35% Compute dividend yield. A company's dividend yield is computed by dividing dividend per common share by market price per common share. (Hint: Use the current per share 2.1% price for your selected company.) Is your company's dividend yield a reasonable return given current market conditions? GAP Inc. return on investment is high meaning it increased compared to prior years. The company is effectively allocating their capital to profitable investments and generating significant returns which is approximately double the industry average. Notes to the Financial Statements Chapter 3: Notes to the Financial Statements - Question 1 How does your company define \"cash and cash equivalents\"? Company includes Cash, Bank Certificate of deposits and time deposits, Money Market Funds in cash and cash equivalents. Chapter 3: Notes to the Financial Statements - Question 2 How does your company value its \"inventories\"? Explain the meaning of the inventory valuation method. Are domestic and international inventories valued the same? Service companies will typically not have inventory. The company value its \"inventories\" by lowering of Cost or Market. Chapter 3: Notes to the Financial Statements - Question 3 Does your company report any investments in marketable securities? Identify the respective amount(s) invested. Category Current Year Amount Trading Securities Available-for-Sale Securities Held-to-Maturity Debt Securities $88m $134m 0 Chapter 3: Notes to the Financial Statements - Question 4 Note 1 and a separate note on income taxes should provide the information to answer this question. What was your company's income tax expense for the current year? How much cash was paid for income taxes in the current year? (Hint: Review the SCF. The difference generally $751m $87m relates to the accrual basis of accounting.) Identify the three major elements, such as depreciation or other postemployment benefits, that gave rise to deferred tax assets or deferred tax liabilities: Deferred Tax Assets Deferred Tax Liabilities Deferred Rent Depreciation and Amortization Accrued Payroll and related benefits Unremitted earnings of foreign subsidiaries Inventory Capitalization & other adj. Unrealized gain on cash flow hedges What is this year's effective tax rate for your company? What is the current year statutory rate? Effective Tax Rate: __ 37.3 ____% Statutory Tax Rate: ___ 35 ___% Chapter 3: Notes to the Financial Statements - Question 5 Reviewing note #1, any related supporting notes, and/or the 10-K, identify the fixed asset group(s), depreciation methods used, and the estimated useful lives of these fixed assets. Fixed Asset Group Depreciation Method Estimated Lives (range) Leasehold Improvements Straight Line Method Shorter of remaining lease term or economic life Up to 15 years Furniture & Equipment Straight Line Method Up to 15 years Building & Building Imp. Straight Line Method Up to 39 years Software Straight Line Method 3 to 7 years Click here to enter text. Click here to enter text. Click here to enter text. Chapter 3: Notes to the Financial Statements - Question 6 Review the balance sheet, note #1, and any related notes and identify the amount of goodwill reported in the current year. Amount reported in current year. $99m Identify the amount of any significant write-down of goodwill that occurred during the current year. 0 How does management describe how it accounts for goodwill as disclosed in the note(s) to the financial statements? During the fourth quarter of 2014 we concluded our annual impairment test of goodwill and we did not recognize any impairment charges. Chapter 3: Notes to the Financial Statements - Question 7 Given present executive compensation packages, why would the user of financial information prefer a company follow SFAS No. 123(R) instead of APBO No.25? Explain. Because SFAS No. 123 (R) records stocks issued under stock option plan at market price of stock rather than book value of stock which is a better approach. Chapter 3: Notes to the Financial Statements - Question 8 Review your company's lease note (and related balance sheet information), then identify the following amounts: Minimum lease payments under operating leases $1,319m Minimum lease payments under capital leases NA Ratio of operating lease payments to capital lease payments NA As a user of reported financial information, would you be concerned about a significant amount of operating leases that are not reported in the balance sheet? Explain. The operating lease rental payments should be reported in financial statements and user of these statements I will be concerned to about these figures. Chapter 3: Notes to the Financial Statements - Question 9 Review your company's long-term debt note and identify the following (consider the three most significant liabilities only): Instrument Maturity Date Rate Amount Due Notes April, 2021 5.95% $1.25 billion Unsecured Term Loan Four Years variable Yen 15 billion Click here to enter text. Click here to enter text. Click here to enter text. Click here to enter text. How much interest expense was recognized in the current year? $75m How much cash was paid for interest in the current year? (Hint: Look in the SCF.*) $77m *The difference between interest expense and cash paid for interest is due to the accrual basis of accounting (and in some cases, the capitalization of interest). Chapter 3: Notes to the Financial Statements - Question 10 Review your company's pension and OPEB note (if applicable) and answer the following questions. Pensions OPEB How much is the Projected Benefit Obligation (PBO) and Accumulated Postretirement Benefit Obligation (APBO) for your company at the end of the current year? NA NA What was the amount of pension or OPEB benefits paid to plan participants during the current year? NA NA What amount of cash did the company contribute to the respective funds during the current year? This is known as \"employer contributions.\" NA NA What is the value of the plan assets at the end of the current year? NA NA Based on your review of the plan assets and the projected benefit obligation (or accumulated postretirement benefit obligation), has your company sufficiently funded its employee benefit plans (this is known as funded status)? No clear information available, hence no comment. An expected average return on invested plan assets is used to reduce the volatility in the reporting of pension or OPEB expense. Higher expected average returns reduce pension or OPEB expense, and lower expected returns increase pension expense. What rate of return on plan assets does your company used to compute pension or OPEB expense? Does this appear reasonable, given present market conditions? Rate employed? _____ Click here to enter text. ___ Response: Click here to enter text. Chapter 3: Notes to the Financial Statements - Question 11 Based on your review of the contingencies note, briefly identify specific events that have led to the accrual of contingent liabilities in your selected company's the balance sheet. Company has shown contingent lease rent and agreement with IBM as contingencies. Chapter 3: Notes to the Financial Statements - Question 12 Based on your review of the segment-reporting note to the financials, identify the reported operating segments, their related revenues, and operating income. Identify the largest three if more than three are disclosed. Reportable Operating Segments Net Sales Revenue US 1 Net Operating Income 12,672 NA Canada 1,137 NA Europe 917 NA Chapter 3: Notes to the Financial Statements - Question 13 Based on your review of the segment-reporting note to the financials, identify the geographical segments and their related revenues. Identify the largest three if more than three are disclosed. Country US 1 Canada Europe Net Sales Revenue 12,672 1,137 917 Chapter 3: Notes to the Financial StatementsQuestion 14 Based on your review of the notes to the financials or the statement of stockholders' equity, identify the components (no more than four) that comprise Other Comprehensive Income for your company. Component Amount Foreign Currency Translation -47 Change in fair value of derivative financial instruments 118 Reclassification adjustment for realized gains on derivative financial instruments -41 Click here to enter text. Click here to enter text. CHAPTER 4 - FINANCIAL ANALYSIS Evaluating the financial performance of your company consists of interpreting current measures compared to prior years and industry average benchmarks. You can locate industry average data at: http://investing.money.msn.com/investments/key-ratios?symbol=ibm o Reported on a rolling four quarter basis. Your library holdings Other sources from the web Summary Financial Analysis Report Profit Margin % - Identify source for industry data Answers how well the business performed. Gross Profit / Total Revenue Pre-Tax Margin Operating Income / Total Revenue Net Profit Margin Net Income / Total Revenue Sales Financial Statement Operatin g Income Financial Statement Financial Statement Company Two Years Prior Company One Year Prior 39.43% 38.97% 38.27% 44.60 % 12.41% 13.31% 12.67% 12.80 % 7.25% 7.93% 7.68% 5.26% 15,651 16,148 16,435 1,942 2,149 2,083 1,936 Gross Margin Operatin g Cash Flows http://www.dailyfinance. com/ 1,705 2,129 Company Industry Not required Not required Not required Evaluate Profitability (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find increasing performance, above or below industry average. For a company with a stability strategic focus you will likely find stable performance, above or below industry average. For a company in a retrenchment strategic focus you will likely find poor performance, below industry average with efforts to improve and approach industry average. Note: Sales, operating income and operating cash flows should trend in approximately the same direction. This signals a stable operating business environment. If the three measures are not trending together, this signals lack of control by management.) An analysis stock report may also provide useful insight. GAP Inc. has a growth strategic focus on improving performance by increasing and moving in an upward direction. Sales, operating income and operating cash flows are trending in the same direction. This suggest that the company can meet its short term debt obligations and is in a great shape. Financial Condition - Identify source for industry data Signals ability to take on additional debt and liquidity. Debt/ Equity Ratio (Total Liabilities - Current Liabilities) / Total equity Current Ratio Current assets / Current liabilities Quick Ratio Interest Coverag e (Cash and Short Term Investments + Short Term Investments + Total Receivables, Net) / Current Liabilities (Net income + tax expense + interest expense) / interest expense http://www.dailyfinance .com/ Company Two Years Prior Company One Year Prior 0.77 0.76 1.25 0.55 1.76 1.81 1.93 1.80 1.39 1.41 1.52 0.70 22.32 35.23 27.77 12.20 Company Industry Evaluate Financial Condition (often labeled liquidity and solvency analysis) (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find stable or slightly decreasing liquidity, above or below industry average. Debt to equity often is increasing in a growing company. For a company with a stability strategic focus you will likely find stable liquidity, above or below industry average. Debt to equity often is stable as well. For a company with a retrenchment strategic focus you will likely find poor liquidity, below industry average with efforts to improve and approach industry liquidity. Debt to equity often is decreasing in a company during retrenchment.) An analysis stock report may also provide useful insight. GAP Inc. is experiencing good solvency based on the debt to equity ratio. The current ratio is trending upwards and is above the Industry average. This means that the company can meet its short term debt obligations, this is in accordance with their growth strategic focus. Investment Return % - Identify source for industry data Signals performance for managers and owners. Company Two Years Prior Company One Year Prior http://www.dailyfinance .com/ Industr y Company Average is defined: (beginning of the year + end of the year) / 2 To compute \"Company Two Years Prior\" and \"Company One Year Prior\" go to the company website and pull the prior annual reports for the necessary data. Return On Equity Net Income / Average Total Equity Return On Assets Net Income / Average Total Assets 39.22 41.80% 42.30% NA 15.19% 16.31% 16.41% 8.90 Evaluate Investment Return (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find increasing returns. For a company with a stability strategic focus you will likely find stable investment returns. For a company in a retrenchment strategic focus you will likely find poor and stable investment solvency, below industry average.) An analysis stock report may also provide useful insight. GAP Inc. return on investment is high meaning it increased compared to prior years. The company is effectively allocating their capital to profitable investments and generating significant returns. It is also approximately double the industry average Management Efficiency - Identify source for industry data Signals how well the company was run by management. Company Two Years Prior http://www.dailyfinanc e.com/ Company One Year Prior Company Industr y Average is defined: (beginning of the year + end of the year) / 2 To compute \"Company Two Years Prior\" and \"Company One Year Prior\" go to the company website and pull the prior annual reports for the necessary data. Receivabl e Turnover Total Revenue / Average Accounts Receivable Trade, Net NA NA NA 26.10 Inventory Turnover Asset Turnover Cost of Revenue, Total / Average Total Inventory Total Revenue / Average Total Assets 9.90 8.38 8.70 4.30 2.10 2.06 2.14 1.80 Evaluate Management Efficiency (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find improving efficiency, above or below industry average. For a company with a stability strategic focus you will likely find stable efficiency, above or below industry average. For a company in a retrenchment strategic focus you will likely find poor efficiency, below industry average with efforts to improve and approach industry average.) An analysis stock report may also provide useful insight. GAP Inc. management is improving efficiency and is above the industry average. They are trying to return GAP brand to growth by rebuilding leadership team and implementing strategies to strengthen the brand and successfully compete on the global environment. CHAPTER 5 - DECISION-MAKING PROCESS N ow you must make two decisions. Chapter 5: Decision-making Process - Question 1 Based upon your review, do the numbers support the company's explicit strategic focus: a growth, stability or retrenchment focus? Why or why not? GAP Inc. financial data supports the company's explicit strategic focus which is growth this is apparent by the increase and upward movement in majority of the ratios. All the ratios are performing well. They are expanding operations globally but are also resizing some outlets and replacing them with new markets. The company is taking measures to continue its growth and perform effectively and efficiently. The company also is investing its capital properly resulting in high returns in investment. Chapter 5: Decision-making Process - Question 2 Return to the first question in this project. Chapter 1: Identify Why You Selected This CompanyQuestion 1 A) What is/are your motivation(s) or interest(s) in selecting this company? B) What question(s) are you seeking to answer? You were asked to explain why you were investigating this company's annual report. You have likely uncovered numerous pieces of information, some with conflicting insight. This may involve both financial and nonfinancial information. In addition, you may have found certain information to be incomplete for decisionmaking purposes. This is real world analysis. Most business decisions are made with as much reliable information as possible, yet common to the decision-maker is a desire for more information. Prepare a thorough, yet concise answer to your original questions A and B above. For example, would you work for this company, why or why not? Support your response with the information gathered throughout your annual report study. A) I would be interested in working for GAP Inc. because in the Chief Executive Officer speech you can see the company is interested in making progress growth wise by implementing strategies to enhance products and retain experience and talent. They are eager to invest in their staff and increase their pay. Last but not least me being a female respect that GAP Inc. treats us equally to man so there is room for upward mobility. I would also invest in this company after evaluating the financial statements because they have an increase in majority of the ratios and return in investments by attracting new investors and expand business hence I can expect a high return on my investment. B) I think I have sufficient information from the 2014 Annual Report to make an informed decision whether to invest in GAP Inc. and have determine that the company is profitable. So I have no more questions at this point in time. Chapter 5: Validate Your Conclusion - Question 1 The Altman Z-score is a predictive model created by Edward Altman in the 1960's. The score combines and weights financial ratios and other measures to estimate the likelihood of a company going bankrupt. The lower the Altman Z-score the higher the odds of bankruptcy. Research findings suggest the Z-score predicts 72 - 80% of corporate bankruptcies two years prior to the actual filing. Z-score > than 3 = considered healthy Z-score between 1.8 and 3 = considered a warning sign Z-score