The Gap, Inc. Financial Accounting

Part A). Using the Annual Report from “The Gap, Inc.”, try to answer the following questions: 


Does “The Gap, Inc.” follow the matching principle? Why or why not? Can you give any evidence from the 10K report? 


- “The Gap Inc.” follows the GAAP and they are supposed to follow the matching principle where they must match the cost with the revenue. As per “The Gap, Inc.” income statement (page 23), we noticed the use of the basis for both revenues and expenses that are recognized and recorded when the obligations take place, and for the $ 15,516 million sales that the company recorded in 2016 are matched with their associated costs and expenses.

For example, the rent (page 51) is an accrued expense that is immediately recognized and recorded in to match the expenses incurred but paid at the same period when the revenue is generated. The rent expense actually increases with an increase of liabilities (AP) and the company considerers it as short/long term tenant alliance liability.

Do salaries of the employees working at the distribution centers belong to the Cost of Goods Sold? What about employees working for sourcing operations? Do you think it is consistent to do so? 


- Salaries of employees working at the distribution centers should be under operating expenses not COGS as per the operating results (page 16) of the 10-K report. However, employees working for sourcing operations should be under COGS since this cost is assigned to the product during the manufacturing phase (page 50), moreover and according to the risks stated in 10K, namely the risk linked to global sourcing and manufacturing (page 8) it clearly states that labor belongs to the sourcing and hence by manufacturer and recorded as COGS for “The Gap Inc.”.

This behavior we think is consistent, for most of “The Gap Inc.” production is outsourced (page 8) and thus these employee’s salaries and wages should be covered by their factor and not by “The Gap Inc.” who covers its distribution center employees’ salaries.

Part B). For the fiscal year ended on January 28, 2017:

Look at the balance sheet. Prepare the 7-account balance sheet of the company for the last fiscal year. Merge as many accounts as you can to simplify the balance sheet.

January 28, 2017 January 30, 2016

Cash $1,783 $1,370

Accounts Receivable $702 $742

Fixed Assets $3,295 $3,488

Inventory $1,830 $1,873

Total Assets $7,610 $7,473

Accounts Payable $2,453 $2,535

Debt $2,253 $2,393

Equity $2,904 $2,545