Financial Statement Analysis Comparison of Two Companies

11-38 Financial statements for two companies, The Gap and Intimate Brands, are presented below. Although the notes were omitted, a statement from each company's auditor is included. Both companies are in the retail apparel industry.

Independent Auditors' Report

To the Shareholders and Board of Directors of The Gap, Inc.:

We have audited the accompanying consolidated balance sheets of The Gap, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three fiscal years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the company and its subsidiaries as of January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998 in conformity with generally accepted accounting principles.

Deloitte & Touche LLP San Francisco, California February 27, 1998

1997 Annual Report

Gap Inc.

Consolidated Statements of Earnings

Fifty-two Weeks Ended ($000 except share and per share amounts)

January 31, 1998

Fifty-two Fifty-three

Weeks Ended Weeks Ended

February 1, 1997 February 3, 1996

Net sales $ 6,507,825

Costs and expenses

Cost of goods sold and occupancy expenses

4,021,541

Operating expenses 1,635,017

Net interest income (2,975)

Earnings before income taxes Income taxes Net earnings

854,242 320,341

533,901

748,527 295,668

452,859

585,199 231,160

354,039

$

Weighted-average number of

shares-basic 396,179,975

417,146,

631

417,

718

,397

Weighted-average number of

shares-diluted 410,200,758

427,267,

220

427,

752

,5 15

Earnings per share-basic $ 1.35

$ 1

.09

$

.85

Earnings per share-diluted 1.30

1

.06

.83

Gap Inc.

Consolidated Balance Sheets

($000)

January 31,

1998

February

1,

1997

Assets

Current Assets

Cash and equivalents

$ 913

,169

$

485

,644

Short-term investments

-

135

,632

Merchandise inventory

733

,174

578

,765

Prepaid expenses and other current assets

184

,604

129

,214

Total current assets

1,830

,947

1,

329

,255

Property and Equipment

Leasehold improvements

846

,791

736

,608

Furniture and equipment

1,236

,450

960

,5 16

Land and buildings

154

,136

99

,969

Construction-in-progress

66

,582

101

,520

2,303

,959

1,

898

,613

Accumulated depreciation and amortization

(938

,713)

(7

62,

893)

Property and equipment, net

1,365

,246

1,

135

,720

Long-term investments

-

36

,138

Lease rights and other assets

141

,309

125

$2,626,927

Total assets

$2,626,927

Liabilities and Shareholders' Equity

Current Liabilities

Notes payable

$

84,

794

$ 40,050

Accounts payable

416,

976

351,754

Accrued expenses

389,

412

282,494

Income taxes payable

83,

597

91,806

Deferred lease credits and other current liabilities

16,

769

8,792

Total current liabilities

991,

548

774,896

Long-Term Liabilities

Long-term debt

496,

044

-

Deferred lease credits and other liabilities

265,

924

197,561

Total long-term liabilities

761,

968

197,561

Shareholders' Equity

Common stock $.05 par value

Authorized 500,000,000 shares; issued 439,922,841

and 476,796,135 shares; outstanding 393,133,028

and 411,775,997 shares

21,

996

23,840

Additional paid-in capital

317,

674

434,104

Retained earnings

2,

.392,

750

1,938,352

Foreign currency translation adjustments

(15,

, 230)

(5,187)

Deferred compensation

(38,

, 167)

(47,838)

Treasury stock, at cost

(1,

.095,

037)

(688,801)

Total shareholders' equity

1,

.583,

986

1,654,470

Total liabilities and shareholders' equity

$ 3,

.337,

502

Consolidated Statements of Cash Flows

Fifty-two Fifty-two Fifty-three

Weeks Ended Weeks Ended Weeks Ended

($000) January 31, 1998 February 1, 1997 February 3, 1996

Cash Flows from Operating Activities

Net earnings $

533,

901

$

452,

.859

$ 354,039

Adjustments to reconcile

net earnings to net

cash provided by

operating activities:

Depreciation and

amortization(a)

269,

706

214,

905

197,440

Tax benefit from exercise

of stock options by

employees and from

vesting of restricted stock

23,

682

47,

348

11,444

Deferred income taxes

(13,

706)

(28,

897)

(2,477)

Change in operating assets and liabilities:

Merchandise inventory

(156,

091)

(93,

800)

(113,021)

Prepaid expenses and other

(44,

736)

(16,

355)

(15,278)

Accounts payable

63,

532

88,

532

1,183

Accrued expenses

107,

365

87,

974

9,427

Income taxes payable

(8,

214)

25,

706

24,806

Deferred lease credits and

other long-term liabilities

69,

212

56,

681

21,524

Net cash provided by

operating activities

844,

. 651

834,

953

489,087

Cash Flows from Investing Activities

Net maturity (purchase) of

short-term investments

174,

709

(11,

774)

116,134

Net purchase of long-term

investments

(2,

939)

(40,

120)

(30,370)

Net purchase of property

and equipment

(465,

843)

(371,

833)

(302,260)

Acquisition of lease

rights and other assets

(19,

779)

(12,

206)

(6,623)

Net cash used for investing activities

(313,

852)

(435,

933)

(223,119)

Cash Flows from Financing Activities

Net increase in notes payable

44,

462

18,

445

20,787

Net issuance of long-term debt

495,

890

-

-

Issuance of common stock

30,

653

37,

053

17,096

Net purchase of treasury stock

(593,

142)

(466,

741)

(71,314)

Cash dividends paid

(79,

503)

(83,

854)

(66,993)

Net cash used for

financing activities

(101,

640)

(495,

097)

(100,424)

Effect of exchange rate

changes on cash

(1,

634)

2,

155

(465)

Net increase (decrease)

in cash and equivalents

427,

525

(93,

922)

165,079

Cash and equivalents at

beginning of year

485,

644

579,

566

414,487

Cash and equivalents at

end of year $

913,

169

$

485,

644

$ 579,566

See Notes to Consolidated Financial Statements.

(a) Includes amortization of restricted stock, discounted stock options, and discount on long-term debt.

Intimate Brands, Inc. Consolidated Statements of Income

(Thousands except per share amounts)

1997 1996 1995

NET SALES $

3

,617

,856

$ 2

,997

,340

$ 2,516,555

Costs of Goods Sold,

Occupancy and

Buying Costs

(2

,257

,824)

(1

,942

,295)

(1,695,627)

GROSS INCOME

1

,360

,032

1

,055

,045

820,928

General, Administrative and

Store Operating Expenses

(787

,780)

(584

,903)

(434,632)

Special and Nonrecurring

Charge

(67

,600)

(12

,000)

-

OPERATING INCOME

504

,652

458

,142

386,296

Interest Expense

(30

,326)

(32

,544)

(49,536)

Other Income, Net

8

,610

4

,612

3,299

INCOME BEFORE INCOME TAXES

482

,936

430

,210

340,059

Provision for Income Taxes

194

,000

172

,000

136,000

NET INCOME $

288

,936

$

258

,210

$ 204,059

DILUTED AND BASIC NET INCOME

PER

SHARE:

$

1.14

$

1.02

$ 0.92

Intimate Brands, Inc. CONSOLIDATED BALANCE SHEETS

(Thousands)

ASSETS

JANUARY

31,

1998

February

1, 1997

CURRENT ASSETS:

Cash and Equivalents

$

308

,720

$

135,111

Accounts Receivable

34

,639

18,750

Inventories

417

,703

434,800

Intercompany Receivable

12

,457

60

Other

102

,540

68,255

TOTAL CURRENT ASSETS

876

,059

656,976

PROPERTY AND EQUIPMENT, NET

392

,504

395,647

OTHER ASSETS

79

,137

82,539

TOTAL ASSETS

$ 1

,347

,700

$

1,

,135,162

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts Payable

$

94,498

$

88,896

Accrued Expenses

224

,380

136,598

Income Taxes

94

,058

98,187

TOTAL CURRENT LIABILITIES

412

,936

323,681

LONG-TERM DEBT

350

,000

350,000

DEFERRED INCOME TAXES

13

,068

50,935

OTHER LONG-TERM LIABILITIES

10

,901

8,493

SHAREHOLDERS' EQUITY:

Common Stock

2

,527

2,527

Paid-In Capital

674

,620

675,240

Retained Earnings (Deficit)

(114,465)

(272,071)

562

,682

405,696

Less: Treasury Stock, at Cost

(1

,887)

(3,643)

TOTAL SHAREHOLDERS' EQUITY

560

,795

402,053

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$ 1

,347

,700

$

1,

,135,162

Intimate Brands, Inc.

Consolidated Statements of Cash Flows

(Thousands)

1997

1996

1995

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income $

288

,936

$ 258

,210

$ 204,059

IMPACT OF OTHER OPERATING ACTIVITIES ON

CASH

FLOWS

Depreciation and Amortization

106

,197

85

,573

75,686

Special and Nonrecurring

Charge, Net of Income Taxes

40

,600

7

,200

-

CHANGE IN ASSETS AND LIABILITIES

Inventories

7

,097

(75

,954)

(63,374)

Accounts Payable and Accrued

Expenses

55

,785

53

,510

33,459

Income Taxes

(14

,996)

3

,664

92,808

Other Assets and Liabilities

(43

,144)

5

,461

(18,730)

NET CASH PROVIDED BY OPERATING

ACTIVITIES

440,475

337

,664

323,908

INVESTING ACTIVITIES

Capital Expenditures

(124

,275)

(123

,630)

(128,229)

FINANCING ACTIVITIES

Proceeds from Short-Term

Borrowings

-

-

250,000

Repayment of Short-Term

Borrowings

-

-

(800,000)

Proceeds from Sale of

Common Stock

-

-

677,948

Dividends Paid

(131

,330)

(121

,270)

(280,324)

Purchase of Treasury Stock

-

(3

,986)

-

Decrease (Increase) in

Intercompany Receivable

(12

,397)

34

,076

(34,136)

Stock Options and Other

1

,136

162

(5,941)

NET CASH USED FOR FINANCING ACTIVITIES

(142

,591)

(91

,018)

(192,453)

NET INCREASE IN CASH AND EQUIVALENTS

173

,609

123

,016

3,226

Cash and Equivalents, Beginning

of Year 135,111

12

,095

8

,869

CASH AND EQUIVALENTS, END OF YEAR $

308

,720

$ 135,111

$ 12,095

In 1995, non-cash financing activities included the transfer of equity to debt of $550 million of short-term intercompany borrowings and $350 million of long-term intercompany debts.

The accompanying notes are an integral part of these Consolidated Financial Statements.

COOPERS & LYBRAND LLPL.L.P.

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statement of Intimate Brands, Inc. on Form S-8, Registration Nos. 333-1960, 333-04921, 333-04923, and 33310215 of our report dated February 20, 1998, on our audits of the consolidated financial statements of Intimate Brands, Inc. and subsidiaries as of January 31, 1998, and February 1, 1997, and for the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996, which are included in this Annual Report on Form 10-K.

COOPERS & LYBRAND LLP Columbus, Ohio April 28, 1998

Required a. Conduct a complete analysis of each company's financial statements using the financial statement analysis framework (to the extent possible given the available data).

b. Review the statements provided by each firm's auditor. In what ways are they comparable? Non-comparable? In the case of Intimate Brands, where could a more complete audit report be obtained? Indicate whether you can rely on the information supplied by the auditors. Why?

c. Prepare a memo to an investor who is contemplating an equity investment of $100,000 in one of these two firms. Make a firm recommendation as to whether such an equity investment in either firm can be supported by your analysis.

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