The consolidated balance sheets of Gap Inc. included merchandise inventory in the amount of $1,625 as of January 30, 2016 (the end of fiscal year 2015) and $1,615 as of January 31, 2015 (the end of the fiscal year 2014). Net sales were $14,535 and $14,632 at the end of fiscal years 2015 and 2014, respectively. Cost of goods sold and occupancy expenses were $9,261 and $8,783 at the end of fiscal years 2015 and 2014, respectively. All amounts are from Gap Inc.’s 2015 Form 10-K.

1. Gap Inc. does not include accounts receivable on its balance sheet, most likely due to Credit card sales and a lack of sales on credit.

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Correct

2. Identify and analyze the transaction to record sales during the year ended January 30, 2016.

Activity	Operating
Accounts	Cash Increase, Sales Increase
Statement(s)	Balance Sheet and Income Statement

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1) Determine activity.
1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock.
1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities.
1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business.
2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases.
3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity.
Income Statement accounts: Revenues – Expenses = Net Income.
(Equations must stay in balance)
4) Record receipt of cash (increase) for sales revenue (increase).

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank or enter "0". If the effect is negative, use the minus sign.
Enter amounts in millions of dollars. For example, 12,400,000,000 would be entered as 12,400.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Cash

No Entry

Sales

No Entry

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Partially correct

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?
Sales returns and allowances

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Consider the difference between gross and net sales.

4. Reconstruct the Cost of Goods Sold section of Gap Inc.'s 2015 income statement. Enter amounts in millions of dollars. For example, 12,400,000,000 would be entered as 12,400.

Gap Inc.
Cost of Goods Sold
For the Year 2015
Merchandise inventory, 1/31/15
Cost of goods purchased
Cost of goods available for sale
Merchandise inventory, 1/30/16
Cost of goods sold

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Review the cost of goods sold calculation when inventory is involved.

5. Calculate the gross profit ratios for Gap Inc. for 2015 and 2014. If required, round the percentage to one decimal place.

Gap's 2015 gross profit ratio:
Gap's 2014 gross profit ratio:

Is the company's performance improving?