From the course: Accounting Foundations: Leases
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The Gap: Adjusted debt ratio and asset turnover ratio
From the course: Accounting Foundations: Leases
The Gap: Adjusted debt ratio and asset turnover ratio
- Using The Gap's reported numbers, we computed the debt ratio and the asset turnover ratio like this. Recall the debt ratio's total liabilities divided by total assets and in the case of The Gap, it was 55.9%. The asset turnover ratio, if you recall, is sales divided by total assets, and for The Gap, their asset turnover ratio was 2.06. We said that these numbers appear to be pretty normal, the debt ratio is in line with the debt ratios of other large U.S. companies and the asset turnover ratio is about the same as that for one of Gap's competitors, Nordstrom. But we also know that The Gap is using a large number of assets under unreported operating lease contracts. These operating lease contracts are also associated with a large amount of unreported liabilities, the obligation to make those future lease payments. That unreported amount is about $4.8 billion. $4.8 billion in unreported assets and $4.8 billion in unreported liabilities. So, what would The Gap's…
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