The Gap Inc Company S Business Performance Was Not Good Accounting Essay

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According to the income statement and Balance Sheet of Gap Inc., it is clearly follows that the total revenue for the year of 2008, 2007, 2006 and 2005 was decreased.

That means the Gap. Inc. Company's business performance was not good. And also their Gross Profit Margin and Net Profit margin was periodically decreasing. In that situation if we invest any amount of money in this concern should be a faulty decision. But to make this business concern more profitable we have to invest more money. But before that we have to look-over the Income Statement and balance sheet of this concern. It can help us to take a right decision about when and where we have to invest more money and how the money will be allocate.

The given Balance Sheet and the Statement of Income shows present financial condition of the business but they are only the starting point for successful financial management. And the Ratio analysis calculates the Financial Statements to analyze the progress, success and failure of the business.

Ratio Analysis shows the business to spot trends in a business and to compare its condition and performance with the average performance of the last four years in the concern. Ratio analysis may present the all-important early warning indications that allow us to solve the business problems before the business is destroyed.

In this concern it shows that the business increased its sale periodically. That means in the year of 2005 to 2008 it increases its sale from £9886 to 10071 in 2008. But the gross profit is decreased from £6381 in 2005 to £5692 in 2008. (All figure in millions in GBP).

Revenue Income:

Mostly, incomes and expenditures that take place regularly, as opposed to capital income and expenditure. Salaries, Rent, Printing and Stationary are examples of Revenue Expenses.

Discount allowed, Rent received etc, are examples of Revenue Incomes.

The concern Gap. Inc. Revenue income gradually decreasing from 2005 to 2008. In 2005 it was £16267, in 2006 it was £16019, in 2007 it was £15923 and in 2008 it was £15763. So, comparing 2008 to 2005 the revenue was decries by 3% yearly. That means somehow there gross profit is decreasing year by year.

Causes: a) It may be the cause of worldwide Recession.

b) High label of competition.

c) Un-ability of substitute product.

Gross profit :

Gross profit means, total sales minus total cost of production. The following income statement shows that, during the period of 2005 to 2008, their gross profit increases periodically. The concern get a gross profit of £6381 in 2005, in 2006 it get gross profit of £5874, in 2007 it get £5657 and in 2008 it get gross profit of £ 5692 . it is clear that gross profit dropped by 11% since 2005.

That means the basic income or gross profit is ok. But, the income statement clearly shows that the indirect expense of the company was too high and it was gradually increased throughout the period of 2005 to 2008. It may be the cause of:

Change in the total revenue stated above.

The cost of goods sold had increased by £ 185 since 2005

Operating Income:

According to accounting rules, operating income means earning before indirect expenses like interest, tax or operating income means a measure of a firm's profitability that excludes interest and tax (EBIT) expenses. Here we can review the profitability of the company.

The operating income of the company was varies differently during the period of 2005 to 2008. In 2005 the operating income of the concern was £1979, in 2006 it was £1775, in 2007 it was £1225 and in 2008 it become £1315. So, it clearly seems that the operating income of the company is gradually decreasing throughout the period of time. So, Operating income fallen by £ 664, and percentage of change is 34%.

Reason for this may be the total operating expenses have remained steadily compared to the top half of the income statement which has dropped, thus the fall being reflected to the operating income.

Operating income for a company gives an idea, how the company is doing their business. Owner and managers can use the information to make decisions about future operations. They may discontinue unprofitable products, increase advertising for profitable products, and look for ways to reduce costs.

In this case we have to find the company's revenue by adding together all income and expenses for the period of time. After calculating all expenses and income or alliances from revenue we have to arrive at net revenue and then we have to come to cost of goods sold (COGS). This cost should be the direct expenses of manufacturing cost. Then we have to subtract the Cost Of Goods Sold like goods returns, discount or alliances etc. Direct expenses are cost of raw materials, wages and other materials whose are directly involved with the production of goods. Then we have to add the indirect expenses like advertising, salespersons, depreciation, office expense, and insurance etc. After that we have to arrive at the operating income.

Net Income

What is net income? When we calculate the cost of production of a product, first we calculate the gross production cost of the product. That means, we calculate the direct cost like raw materials, wages, frats etc. Which is directly involved with the production cost of the finished goods? Here when we subtract production cost from sales price, then we can get gross profit. After that, there is more expenses involved with this production of the goods which is indirectly involved. Like salary, interest, rent etc. This are not directly involved with this production. When we deduct this cost from gross income, we come to net profit or income.

In the Gap. Inc. We found that their net income was gradually fall throughout the year. In 2005 their net income was £ 1150 and in 2006 it was £ 1131, in 2007 it was £ 809 and in 2008 it was £ 867. So, their net income varies throughout the period of 2005 to 2008. So, the net income has been fallen by 25%.

According to balance sheet of this concern I found that the amount of money from net income has been expended on fixed asset. Because it is clearly shows that from 2005 to 2008 the company has invested a lot of money in fixed asset. It shows that in the year of 2005 their fixed asset was £ 10048 but in 2006 it suddenly decreased to £ 8821, in 2007 it was £ 8544 and in 2008 it slightly decreased to £ 7838. I think this is not a good sign! Because in company rules it is necessary to increase or decried the current assets like stock, raw materials, cash in hand etc.


There are two types of assets, current assets and fixed assets. Current assets means cash in hand and cash at bank, cash receivable, marketable securities, inventory, prepaid expenses and other liquid assets that can be readily converted to cash.

Current assets are very important for a business, because these assets can be easily used to fund day-to-day operations and can pay ongoing expenses. Depending on the nature of business.

In this concern current asset was £ 6304 in 2005, £ 5239 in 2006, £ 5029 in 2007, and £ 4086 in the year of 2008. This is not a good sign. In any business concern it is very essential to increase its current assets. It shows the upcoming future of this business concern and also a good, healthy sign. In this business concern, current assets are decreasing periodically year by year. It shows that the concern expenses or invested his money on other heading (I can discuss it in later).

Fixed assets are the assets who are immovable and inter connected with the production and the business. Such as land, plant and machinery, furniture etc. In this concern the fixed assets also increased periodically. In 2005 their fixed of ling term assets was £ 368 and in 2006 it was £ 336 and in 2007 it was £ 318 but in the year of 2008 the fixed assets was increased to £ 4850, that means the concern has been invested a lot of amount in this sector.

All thought, assets of this concern was dramatically increased during this period of 2005 to 2008. In 2005 total assets of this concern was £ 10048, and in the next year the company decreased a lot of amount in this sector, amount was £ 8821. In the next two years it was become to £ 8544 in 2007 and £ 7838 in 2008. That means a major amount of money has been transferred from this sector.

Current Liabilities

If there is any amount of money or goods is payable for the year is called current liability. Like account payable, accrued expenses, tax payable etc. This is a very significant sector of a business concern. Total current liability of Gap. Inc was £ 2242 in the year of 2005. But it rises up to £ 2433 in the tear 2008, which was not a good sign . if any business concern increased their liability periodically, that means the concern dose not going smoothly. Fixing their money in this sector can make an obstacle to go smoothly of the business.

But in liability sector, the company has decreased some of their long-term debits, It was £ 1886 in 2005, £ 513 in 2006, £ 188 IN 2007 in the year of 2008 it was only £ 50.

But, according to balance sheet, this concern has succeeded to minimize their total liability during this period of time. In 2005 the total liability was this concern was £ 5112, in 2006 it was £ 3396 , in 2007 it was 3370 and in 2008 it was £ 3564.

In a business concern, Income Statement and balance sheet acts as a mirror. It reflects the current business condition and its progress. With the statement we can informed about the financial status of the business concern and can take our decision. In a business concern cash flow statement reflects the incoming cash flow and outgoing cash flow during the period of business. Cash is the lifeblood of a company. The cash flow statement shows your business' sources and uses of cash and the starting and ending values for cash and cash equivalents each year. It also includes the combined total change in cash and cash equivalents from all resources and uses of cash. These cash flow statements is very helpful for planning and managing of future financial decision . Availing Cash Flow financing statements Format preparation support from us will act as a very useful money managing tool that provides warnings in advance of periods of high expenditure and low sales. This is also a very important outcome report in the application process for additional essential funding requirement.

In this business concern (Gap. Inc) its income statement clearly shows that the net income for the period of time of 2005 to 2008 was gradually decreases. In 2005 the company earned net profit of £ 1150, in 2006 it earned net profit of £ 1131, in 2007 it earned £ 809 and in the year of 2008 the company earned only £ 876 million GBP. This was very low compares to 2005. And its balance sheet also reflects that concern transferred a lot of money in assets, which is not acceptable in business term. Its total assets were £ 10048 in 2005 but it gradually decreased to £ 7838 in 2008. We have to follow the causes of this transaction.

Calculation of Gross Profit Margin (GPM) and Net Profit Margin (NPM)

All figure in millions of GBP

According to formula:

Gross Profit Margin = Gross Profit / Total Revenue


Here, Gross Profit = £5692 for the year 2008

Here, Gross Profit = £5657 for the year 2007

Here, Gross Profit = £5874 for the year 2006

Here, Gross Profit = £6381 for the year 2005

And the Revenue for the years as given below:

Revenue for the year of 2008 was £ 15763

Revenue for the year of 2007 was £ 15923

Revenue for the year of 2006 was £ 16019

Revenue for the year of 2005 was £ 16267

So, Gross Profit Margin of the company will be :

Year GPM

2008 0.6311

2007 0.3552

2006 0.3666

2005 0.3922

Here it is clear that Gross Profit has been changed by 39% in 2005 to 36% in 2008.

Net Profit Margin

main reason to calculate the net profit margin is to calculate the bottom half income statement of the company.

And Net Profit Margin = Net Income (After Tax) / Total Revenue

So, Net Profit Margin (NPM) For the Year Given Below

Year NPM

2008 0.055

2007 0.0508

2006 0.0706

2005 0.0707

In this scenario Net Profit Margin per income statement has been changed for 7% in 2005 to 5.5% in 2008.