Inferring Depredation Amounts and Determining the Effects of a Depreciation Error on Key R...

Inferring Depredation Amounts and Determining the Effects of a Depreciation Error on Key Ratios (P8-4)

The Gap, Inc., is a global specialty retailer of casual wear and personal products for women, men, children, and babies under the Gap, Banana Republic, Old Navy, Athleta, and Piperlime brands. As of January 31, 2009, the Company operated 3,149 stores across the globe, as well as online. The following is a note from a recent annual report:

Required:

1. Assuming that The Gap, Inc., did not have any asset impairment write-offs but did sell property, plant, and equipment in the most recent year with a cost of $501 million and an accumulated depreciation of $384 million, what was the amount of depreciation expense recorded in the current year?

2. Assume that The Gap, Inc., failed to record depreciation in the current year. Indicate the effect of the error (i.e., overstated or understated) on the following ratios:

a. Earnings per share

b. Fixed asset turnover

c. Current ratio

d. Return on assets