Question

Common-Size and Pro Forma Income Statements
Refer to the income statements for The Gap, Inc., presented below.

a. Prepare common-size income statements for fiscal years 2014 (ending January 31, 2015) and 2013 (ending February 1, 2014).
Round answers to one decimal place (i.e., 0.2568 = 25.7%).

The Gap, Inc. Common-Size Income Statements
Fiscal year ended	Jan. 31, 2015		Feb. 1, 2014
Net sales	$15,779	Answer%	$15,492	Answer%
Cost of goods sold & occupancy expenses	9,925	Answer%	9,634	Answer%
Gross profit	5,854	Answer%	5,858	Answer%
Operating expenses	3,983	Answer%	3,921	Answer%
Operating income	1,871	Answer%	1,937	Answer%
Interest expense	73	Answer%	59	Answer%
Interest income	(3)	Answer%	(3)	Answer%
Income before income taxes	1,801	Answer%	1,881	Answer%
Income taxes	702	Answer%	734	Answer%
Net earnings	$1,099	Answer%	$1,147	Answer%

b. Prepare a pro forma income statement for the fiscal year 2015 (ending January 30, 2016), based on the following assumptions:
- Net sales total $14,000 million.
- Cost of goods sold and occupancy expenses are 64% of sales.
- Operating expenses total 26% of sales.
- Interest income and interest expense are unchanged from the 2014 amounts.
- The Gap's effective tax rate is 39%.

Round answers to the nearest dollar. Use rounded answers for subsequent calculations.
Use a negative sign with your interest income answer only.

The Gap, Inc. Proforma Income Statement
	Jan. 30, 2016
Net sales	$Answer
Cost of goods sold & occupancy expenses	Answer
Gross profit	Answer
Operating expenses	Answer
Operating income	Answer
Interest expense	Answer
Interest income	Answer
Income before income taxes	Answer
Income taxes	Answer
Net earnings	$Answer

Answer 1

• Requirement ‘a’

All percentage values are calculated by taking “Net Sales” as denominator when Common Size Income Statement is prepared.

The Gap, Inc.
Common-Size Income Statements
Fiscal year ended	Jan. 31, 2015		Feb. 1, 2014
Net sales	$       15,779.00	100.0%	$     15,492.00	100.0%
Cost of goods sold & occupancy expenses	$         9,925.00	62.9%	$      9,634.00	62.2%
Gross profit	$         5,854.00	37.1%	$      5,858.00	37.8%
Operating expenses	$         3,983.00	25.2%	$      3,921.00	25.3%
Operating income	$         1,871.00	11.9%	$      1,937.00	12.5%
Interest expense	$             73.00	0.5%	$           59.00	0.4%
Interest income	$              (3.00)	0.0%	$            (3.00)	0.0%
Income before income taxes	$         1,801.00	11.4%	$      1,881.00	12.1%
Income taxes	$            702.00	4.4%	$         734.00	4.7%
Net earnings	$         1,099.00	7.0%	$      1,147.00	7.4%

• Requirement ‘b’

Figures are written in “$ millions”

The Gap, Inc.
Proforma Income Statement
for the fiscal year ending	Jan. 30, 2016
Net sales	$ 14,000.00
Cost of goods sold & occupancy expenses	$ 8,960.00
Gross profit	$ 5,040.00
Operating expenses	$ 3,640.00
Operating income	$ 1,400.00
Interest expense	$       73.00
Interest income	$        (3.00)
Income before income taxes	$ 1,330.00
Income taxes	$     518.70 or $ 519
Net earnings	$     811.30 or $ 811