http://www.gapinc.com/content/attachments/gapinc/GPS_AR13.pdf Access the 2013 An

ID: 2416754 • Letter: H

Question

http://www.gapinc.com/content/attachments/gapinc/GPS_AR13.pdf Access the 2013 Annual Report for The GAP online from the company’s website. Review the financial statements and the notes to the financial statements.

1. What is The GAPs fiscal year-end (in general, not just for each year).

2. List the types of stock The Gap is authorized to issue.

3. Briefly describe the different features of each type of stock.

4. How many shares of common stock are held in treasury at fiscal year-end 2013?

5. From the information provided in the St. of S/E, recreate the journal entry to record the reissuance of treasury stock pursuant to stock options and other stock award plans.

6. Prepare the journal entry to record the declaration and payment of cash dividends for fiscal year 2013 (assume declaration and payment occurs simultaneously).

7. Compute The Gap’s dividend payout ratio for fiscal year 2013.

8. Does The Gap have any potentially dilutive securities outstanding? If so, explain the effect of them on The Gap’s FY2013 EPS.

9. The Gap has stock option and stock award plans. How many do they have?

10. Are any of The Gap’s potential common shares anti-dilutive? State briefly how you know.

11. What is the general vesting period for the company’s stock options?

12. How many stock options were exercised during 2013?

13. Assume that a total of 12,000,000 options were granted at the beginning of fiscal year 2009. Each option granted employees the right to purchase one share of common stock at a price of $14 per share. The options have a 4-year service period. The FV of the options were determined to be $36M. Assume all options exercised during fiscal-year 2013 related to these options, and that they were exercised at year-end, 2013. Prepare the journal entries related to the stock options from 2009 to 2013. (If you do not know how many options were exercised in 2013, assume the amount was 6M for partial credit)

Explanation / Answer

What is The GAPs fiscal year-end : 1st February

List the types of stock The Gap is authorized to issue:

Briefly describe the different features of each type of stock

The Company is authorized to issue 2.3 billion shares of common stock. We are also authorized to issue 60 million shares of Class B common stock, which is convertible into shares of common stock on a share-for-share basis. Transfer of the Class B shares is restricted. In addition, the holders of the Class B common stock have six votes per share on most matters and are entitled to a lower cash dividend. No Class B shares have been issued as of February 1, 2014.

The Company is authorized to issue 30 million shares of one or more series of preferred stock, which has a par value of $0.05 per share, and to establish at the time of issuance the issue price, dividend rate, redemption price, liquidation value, conversion features, and such other terms and conditions of each series (including voting rights) as the Board of Directors deems appropriate, without further action on the part of the stockholders. No preferred shares have been issued as of February 1, 2014.

How many shares of common stock are held in treasury at fiscal year-end 2013?

Treasury stock at cost (660 shares) (14,245)

From the information provided in the St. of S/E, recreate the journal entry to record the reissuance of treasury stock pursuant to stock options and other stock award plans.

Reissuance of treasury stock under share-based compensation plan, net of shares withheld for employee taxes (132) 9 229 97

Prepare the journal entry to record the declaration and payment of cash dividends for fiscal year 2013 (assume declaration and payment occurs simultaneously)

Cash dividends paid $ 321

Cash dividends declared and paid per share $ 0.70

Compute The Gap’s dividend payout ratio for fiscal year 2013

Does The Gap have any potentially dilutive securities outstanding? If so, explain the effect of them on The Gap’s FY2013 EPS

Weighted-average number of shares used for earnings per share is as follows:

Fiscal Year

(shares in millions) 2013

Weighted-average number of shares—basic 461

Common stock equivalents 6

Weighted-average number of shares—diluted 467

The above computations of weighted-average number of shares—diluted exclude 2 million and 12 million shares related to stock options and other stock awards for fiscal 2013 and 2011, respectively, as their inclusion would have an anti-dilutive effect on earnings per share. There were no material shares with an anti-dilutive effect on earnings per share for fiscal 2012.

The Gap has stock option and stock award plans. How many do they have?

The 2002 Stock Option Plan (the “2002 Plan”) was established on January 1, 1999. The 2002 Plan empowered the Committee to award nonqualified stock options to non-officer employees. On May 9, 2006, the 2002 Plan was discontinued, and those awards then outstanding continued to be subject to the terms of the 2002 Plan under which they were granted. Pursuant to the 2011 Plan, any shares (not to exceed 28,019,786 shares) that otherwise would have been returned to the 2002 Plan after May 9, 2006 on account of expiration, cancellation, or forfeiture of awards granted are available for grant under the 2011 Plan.

As of February 1, 2014, there were 216,586,781 shares that have been authorized for issuance under the 2011 Plan, including those shares available for issuance under the 2002 Plan, which have or may become available for issuance under the 2011 Plan.

Are any of The Gap’s potential common shares anti-dilutive? State briefly how you know:

2 million and 12 million shares related to stock options and other stock awards for fiscal 2013 and 2011, respectively, as their inclusion would have an anti-dilutive effect on earnings per share. There were no material shares with an anti-dilutive effect on earnings per share for fiscal 2012.

How many stock options were exercised during 2013:

A summary of Stock Unit activity under the 2011 Plan for fiscal 2013 is as follows:

Weighted Average Exercise Price

Balance as of February 2, 2013

12,800,355

20.56

Granted

1,498,050

36.54

Exercised

(6,151,766)

18.74

Forfeited/Expired

(746,817)

24.77

Balance as of February 1, 2014

7,399,822

24.89