The financial statements for Target Corporation for the year 2016-2017 show an increase in the receivables for the period. The company reported $749 and $929 as the receivables for the two years. The receivables increased by $180 a figure that is significant for the company given that it is more than 24% of the previous year’s value. Receivables turnover for the two years was 171.17 and 179.47 respectively (Morningstar, 2018). The accounts receivables show a growing trend for the company with 2018 reporting a higher figure than the previous years. The notes to the financial statements section did not have any information concerning accounts receivables.
Inventory reported by the company in 2016 and 2017 was $8,309 and $8657 respectively. The inventory has increased by $348 a 4.2% increase. The change in the stock is not significant for the company because the percentage change is low. The company had to increase its inventory to support its sales. The results are surprising given that it is expected that Target should hold more stock to meet its operational needs. However, the additional capital in the year was driven by higher sales reported in the year.
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The people who owe Target company money are the customers who buy on credit and have not yet settle their accounts. The information, however, is included in accounts receivables and not directly shown in the annual report. The statement of financial position also compresses different items including accounts receivable under other current assets.
According to the notes to the financial statements, the company records its inventory at the lower of LIFO or market price. The company accounts the inventory under RIM (retail inventory accounting method). The overall inventory cost includes the amount paid to the suppliers, freight cost and import cost. The company has agreed with its vendors to purchase or pay for the inventory once the merchandise is sold to the customers.
The company records the activities involved in such arrangements under sales and cost of sales in the statement of operations. However, the stock under this program is not included in the statement of financial position. The notes clearly describe the different costs and how the inventory is recorded in the books of account. Similarly, it gives a clear picture of the functioning of RIM.
Accounts receivables
2017 = Sales/Average Accounts receivables
=2934/16.35
=179.47
2016 = Sales/Average Accounts receivables
= 2737/16
=171.0625
Target Corporation has a strong account receivable indicating that the company sells most of its stock on cash. Similarly, it can imply that the company is efficient in collecting its accounts receivables. It is also a clear indication that the company has quality buyers that offset their debt on time. However, the same can indicate a conservative approach towards accounts receivables and therefore filters the customers who are likely to take longer to repay their debt. The changes in the accounts receivable turnover are high indicating the company continues to make significant improvements in the manner in which it manages its activities (Berk & DeMarzo, 2014).
Day’s sales in accounts receivables
2017 = 365/ Accounts receivables
=365/179.47
= 2 days
2016 = 365/171.0625
= 2.13 days
The above calculations show that it takes two days on average to collect all the credit sales of the company. The calculation indicates that the company collects its credit sales quickly. Similarly, it shows that majority of the customers buy in cash and therefore the company Target can collect its accounts receivables quickly and is therefore not faced by liquidity problems (Berk & DeMarzo, 2014).
Inventory turnover
= Cost of sales/Average inventory
= 5.78 for 2016 and 6.03 for 2017
The net property and plant for the two years were $24658 and $25018 for 2016 and 2017 respectively. The property plant and equipment have increased in value in 2017 over 2016. Such increases can be attributed to additional PPE acquired during the year as shown in the investing activities of the cash flow statement. The change is significant because the company acquired PPE worth 2533 even though it disposed of PPE valued at $31.
Amount of interest or coupon rate paid in 2017 is the face value of the bond * the contract rate
Face value =$1,000,000
Contract rate =10%
Bond coupon rate = 1,000,000*10% = 100,000
Journal entries for the issuance of the bond
Jan 1, 2017
Cash $900,000
Discount on Bonds payable $10,000
Bond a payable $1,000,000
To record the issue of bond at a discount
Interest is paid once per year. Similarly, the discount of $10,000 is amortized over the five years at equal amounts of (10000/5) = 2,000.
December 31, 2017
Bond interest expense 102,000
Discount on bond payable 2,000
Cash (1000000*10) 100,000
To record interest paid on December 31 and discount amortization
The net earnings are shown at the beginning of the statement of cash flow. The amounts for the two years are $2737 and $2934 for 2016 and 2017 respectively. The results are shown on page 38 of the form 10-K of Target Corporation. The amounts are equal to those reported on the statement of operations on page 35.
The statement of financial position on page 38 of the form 10-K shows an accumulated depreciation of $18,181 and $17,413 for 2016 and 2017 respectively. The amount covers buildings and improvements, fixtures and equipment and computer hardware and software.
The statement of cash flow does not have any gain in the two years under review. However, there is a loss on debt extinguishment of $422 and $123 in the year 2016 and 2017. The amount was recorded in the net interest expenses. The 2016 value can be attributed to the purchase of $1389 debt which was to mature at a market value of $1800.
Some of the investments held by the company include government securities and long-term bonds, corporate and municipal bond, and derivative investments. All investments are measured at their fair value employing the net asset value.
The financing activities used by the company to increase its assets or cash include long-term debt. However, the company can also use other available options like, obtaining some money from its reserves and the sale of fixed assets and other investments.
The financing activities that reduce cash include the reduction of long-term debt, payment of dividends, and the repurchase of stock.
Free cash flow ratio
FCF = cash from operating activities + interest expenses-tax shield –capital expenditures
=6923 + 666 – (666*35%) – 3717
=$3,638.9
The free cash flows are more than the net earnings reported by the statement of operations.
References
Berk, J., & DeMarzo, P. (2014). Corporate finance (3rd ed.). Boston: Pearson.
Target (2017). Target Corporation annual report form 10 -K
