Question

Refer to the income statement below for The Gap, Inc.

Consolidated Statement of Earnings

Fiscal year ended Jan 31, 2015    Feb 1, 2014

Net Sales    $16,435 $16,148

Cost of goods sold and occupancy expenses 10,146 9,855

Gross profit    6,289 6,293

Operating expenses 4,206    4,144

Operating income    2,083    2,149

interest expense    75 61

interest income (5) (5)

income before income taxes    2,013 2,093

income taxes 751    813

Net earnings    $1,262    $1,280

a. Prepare common-size income statements for fiscal years 2014 (ending January 31, 2015) and 2013 (ending February 1, 2014).

b. Prepare a pro forma income statement for the fiscal year 2015 (ending January 30, 2016), based on the following assumptions:

- Net sales total $15,000 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%.

c. Given the Gap's business strategy, what are the factors that ultimately determine the accuracy of the pro forma statement prepared in b?

Answer 1

Common size income statement
		2015	% of sales = value of individual item/sales value	2014	% of sales = value of individual item/sales value
sales		16435	100%	16148	100%
less cost of goods sold		10146	61.73%	9855	61.03%
gross profit		6289	38.27%	6293	38.97%
operating expenses		4206	25.59%	4144	25.66%
operating profit		2083	12.67%	2149	13.31%
interest expense		-75	-0.46%	-61	-0.38%
interest income		5	0.03%	5	0.03%
income before income tax		2013	12.25%	2093	12.96%
income tax		751	4.57%	813	5.03%
net income		1262	7.68%	1280	7.93%
net sales		15000
cost of goods sold-65% of net sales		9600
gross profit		5400
operating expense-26% of sales		3900
operating profit		1500
interest expense		-75
interest income		5
income before income tax		1430
less income tax-26%		557.7
net income		872.3
Accurcy of proforma income statement will depend on the accuracy to predict the value of sales and value of cost of goods sold.