Target Corporation was founded in 1916 by George Dayton as Dayton Company (Target Brands Inc., 2018). The initial startup money came from the convincing of Reuben Simon Goodfellow Company to move its location to the new building that George had built (Target Brands Inc., 2018). The land George used originated from the Westminster Presbyterian Church in Minneapolis urging George to buy it after the church burned down during the panic of 1893(Target Brands Inc., 2018). The owner of Reuben Simon Goodfellow Company retired leaving the interest at the store, which was taken over by George (Target Brands Inc., 2018).
The total stockholders’ equity at Target Corporation in 2014 was $ 13,997,000,000, reduced to $ 12,957,000,000 in 2015, and then dropped in 2016 to $ 10,953,000,000 (Target Brands Inc., 2017). The main competitors of Target Corporation are Costco and Walmart. In Costco, the total stockholders' equity was at $ 10,778,000,000 in 2016. That was slightly lower than the amount at Target Corporation. In the financial year 2016, the total stockholders' equity at Walmart in 2016 was $ 77,798,000,000. Compared to that of Target Corporation, Walmart was doing much better.
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In a press release in June 2016, Target Corporation released the quarterly sixty cents per common share of the dividends (Target Brands Inc., 2016). That represented a 7.1 % increase in the dividends given out by the company. The prior quarter saw the company give out 56 cents per common share in the form of dividends (Target Brands Inc., 2016). The increase in the dividends was a clear indicator of the increasing intensity of the operations at the company. According to the report, the company is said to have had increases in the dividends payout for the last forty-five years (Target Brands Inc., 2016).
Income measurement/revenue recognition
The IAS-18 Revenue is used in recognition of the revenue from the different sources in the operations of Target Corporation in the retail industry. That contributes to the observance of accuracy in accounting (Khamis, 2016). The IAS-18 is also used by the company to account for the total inflow of monetary resources to the company before the cost of the sales is deducted in the process of accounting at Target Corporation (Khamis, 2016). The IAS-18 Revenue is also used to define the scope of revenue at Target Corporation (Khamis, 2016).
The total revenue in the company in 2016 was $ 73,785,000,000 (Target Brands Inc., 2017). The following year, the revenue dropped to $ 69,495,000,000 (Target Brands Inc., 2017). The drop in the revenue of the company was due to the reduction in the sales of the goods and services of the company to the retail market. The decrease in the revenue has also been caused by the rising costs of production for the products and services at the retailer. Inadequate marketing is another factor that has reduced the revenue at Target Corporation.
The unearned revenue accounts at Target Corporation are classified under the current liabilities in the company's balance sheet. From 2014 to 2016, the amount of money consumed by the current liabilities has been steadily increasing. Therefore, the increase has also been noted in the unearned revenue accounts, which calls for more efficiency in the earning of revenue at the company for proper accounting and accuracy. When the unearned revenue is realized in the accounting of the company, it is made to reduce the balance with a debit and increase the balance on the revenue account with a credit.
Income Taxes
While the cut in the corporate taxes is good news to the financial officers at Target Corporation, the executives will have to decrease the figures in the balance sheet as the earnings grow. That will alter a few of the key financial performance ratios. On the income statement, the revenue earned will record an exponential increase due to the extra cash.
Target Corporation had an annual income tax rate of 19.69% in the financial year 2017 (Target Brands Inc., 2017). The taxed amount in the company amounted to $ 3,646,000(Target Brands Inc., 2017). An increase of $ 2,000,000 in the income of the company is expected to raise the taxation rate in the company. That is because the more the income in a company, the more the incurred taxes by the federal government in the USA.
An increase in the income of two million dollars will have an impact on both the balance sheet and the income statement. Notably, the current assets segment of the balance sheet will increase and thus increasing the net worth of the company. On the income statement, the net profits of the company will be inflated. That will falsify the financial performance of the company.
Target Corporation paid six million dollars as taxes in the fiscal year 2017. The taxes paid in the United States of America by the company amounted to $ 1.25 billion (Target Brands Inc., 2017). About 99% of the income of Target Corporation comes from the operations of the company in the United States of America. The rest 1% is foreign income (Target Brands Inc., 2017).
Leases
In as much as a lease is not treated as ownership of the lessee, operating leases and capital leases are different. The operating leases are considered as renting, and their payments are classified under the operating expenses of the company (Altamuro, Johnston, Pandit, & Zhang, 2014). On the other hand, capital leases are treated more like the ownership of the lease or as a loan and are recorded under the assets on the balance sheet (Grant, 2016).
The company has another of subsidiaries in the United States of America. By 2017, the company had two subsidiaries (Wilson, 2017). In December 2017, Target Corporation opened a store in Vermont at university mall. Most of the branches of the company have rented buildings and spaces across the USA. The headquarters of the company is located in Nicollet Mall in downtown Minneapolis, one of the capital leases that the company has (Wilson, 2017).
With the increase in the expansion of the company to more locations within and without the USA, Target Corporation has had to lease property. An increase in the operating leases has led to an increase in the expenses that are recorded on the balance sheet of the organization (Nuryani, Heng, & Juliesta, 2015). The increasing capital leases such as the larger stores across the USA have increased the number of assets that the company owns.
An advantage of leasing a building is that the taxes incurred by the company are reduced. That is because a lease is considered as an operating expense, which reduces the taxable income in the organization (Shockley, Plummer, Roth, & Fredendall, 2015). On the other hand, leasing a building gives less control to a company in the changing of the designs and interiors of the building for instance. Additional space cannot also be created in case there is the need for one (Murthy & Jack, 2014).
Pensions
From the annual financial statements of the company, the pension plan at Target Corporation has a tax-qualified retirement plan. The pension plan provides benefits to the employees of the company as young as 21 years of age (Pfau, Tomlinson, & Vernon, 2017). The contributions of the employees are not taxed until they withdraw money from the plan. That gives the employees the peace of mind after knowing the company has secured their future. That improves their morale at work and the zeal to work for the company in the long term. The company has used that as an advantage in the past and the present (Pfau, Tomlinson, & Vernon, 2017).
Primarily, pension plans are known to affect the employees' performance at the company (Pfau, Tomlinson, & Vernon, 2017). Employees who are offered a more comprehensive and favorable pension plan are known to have the peace of mind that enables them to increase their productivity (Pfau, Tomlinson, & Vernon, 2017). That makes the employees provide more opportunities for earning at the company. The reduction of the money from the finances of the company to fund the pension plans reduces the amount of money that the organization has in the income statements. That reduces the net income of the company, and consequently the taxable income of the company (Pfau, Tomlinson, & Vernon, 2017).
Target Corporation can consider beginning the 401(k) retirement savings plan for the employees (Pool, Sialm, & Stefanescu, 2016). The 401(k) is one of the cheapest retirement savings plans for the employees in the USA. The retirement plan only taxes the money once the employee wishes to withdraw it from the program (Pool, Sialm, & Stefanescu, 2016). That gives the company an opportunity to save money that would otherwise have been used to pay taxes to the government. The retirement plan also allows the employees to borrow from their retirement savings plan. That makes it easy for the employees to face their lives with financial freedom. The 401(k) retirement savings plan will, therefore, be suitable for the company (Pool, Sialm, & Stefanescu, 2016).
Statement of Changes in Financial Position
Target Corporation has had a long financial journey in the United States of America and has plans underway to expand its coverage in the international market. That has been evident in Canada where the company has opened multiple stores and locations in the Canadian cities and towns. According to the changes noted in the financial position, the investment in Target Corporation may not be advisable. The company has had a drop in the gross and bet profits of the company in the financial years. That has reduced the company’s capability to earn maximally from investments. That has affected the various ratios such as the return on investments, which have also had a drastic drop. To attract investors, the company needs to change its strategies and integrate better technological strategy to boost investments in the company.
One of the matters to be addressed in the statement of changes in the financial position at Target Corporation is the drop in the gross profits of the company. The reduction in the profits many push the potential investors away from the company which may exacerbate the issue of financial retardation. The other concern is the increase in the operating expenses of the company. Target Corporation has had an increase in the operating expenses in the past few fiscal years. That has necessitated the company to look into the various strategies that may cut the costs in the company such as the efficiency of the equipment. That Is set to reduce the money spent by the organization in the running of the activities. The net income has had a reduction in the company. That has also reduced the various financial ratios that indicate its financial robustness.
Report for the CEO
Once the stock has been issued at Target Corporation, the company may be involved in losses. The net income for the first year in the investments will record a loss of more than $ 12 billion. One of the reasons why the company may incur losses is that the management may not have made sound and well-thought decisions about the investments that would necessitate the injection of the additional stock in the company. That may lead to wrong investment of the money in the company. Unless the decision is reconsidered, the company may keep incurring more losses with time.
After the issuance of the $ 5 billion stock at Target Corporation, the total projected assets will increase exponentially from the current $ 37 billion to around $ 92 billion. That will be caused by the sudden increase in the capital of the company. The assets will then reduce in the subsequent two years. The liabilities of the company will increase slightly during the first year of investment and will steadily increase in the following years. That will reduce the net worth of the company as the investments are made in the three years.
The investment amount at Target Corporation will increase with the rise in the amount of stock injected into the company. The payrolls of the employees will remain constant since the company does not plan to employ more workers in the investment. The dividends paid in the company to the shareholders will temporarily increase due to the increase in stock. Nonetheless, that will be short-lived due to the rapid reduction in the profits of the company, which will affect the various ratios such as the earnings per share and the net profit margin.
References
Altamuro, J., Johnston, R., Pandit, S., & Zhang, H. (2014). Operating leases and credit Assessments. Contemporary Accounting Research , 31 (2), 551-580.
Grant, C. T. (2016). No more hiding lease liability: the FASB's new leasing standard ends the Use of multiyear leases for off-balance-sheet financing. Strategic Finance , 98 (1), 40-48.
Khamis, A. M. (2016). Perception of Preparers and Auditors on New Revenue Recognition Standard (IFRS 15): Evidence From Egypt. Jurnal Dinamika Akuntansi dan Bisnis , 3 (2), 1-18.
Murthy, D. P., & Jack, N. (2014). Leasing and maintenance of leased assets. In Extended Warranties, Maintenance Service and Lease Contracts (pp. 239-264). Springer, London.
Nuryani, N., Heng, T. T., & Juliesta, N. (2015). Capitalization of Operating Lease and Its Impact On Firm's Financial Ratios. Procedia-Social and Behavioral Sciences , 211 , 268-276.
Pfau, W. D., Tomlinson, J. A., & Vernon, S. (2017). Retirement Income Programs: The Next Step in the Transition from DB to DC Retirement Plans. The Journal of Retirement , 4 (3), 11.
Pool, V. K., Sialm, C., & Stefanescu, I. (2016). It pays to set the menu: Mutual fund investment Options in 401 (k) plans. The Journal of Finance , 71 (4), 1779-1812.
Shockley, J., Plummer, L. A., Roth, A. V., & Fredendall, L. D. (2015). Strategic design
Responsiveness: An empirical analysis of US retail store networks. Production and Operations Management , 24 (3), 451-468.
Target Brands Inc. (2017). 10k report . Retrieved from https://corporate.target.com/annual-reports/2017/10-K/10-k
Target Brands Inc. (2018). History . Retrieved from https://corporate.target.com/about/history
Target Brands Inc. (2016, June 8). Target corporation announces 7.1 percent dividend increase . Retrieved from https://corporate.target.com/press/releases/2016/06/target-corporation- announces-7-1-percent-dividend
Wilson, R. E. (2017). Target Corporation: Maintaining Relevance in the 21st Century Gaming
Market. Kellogg School of Management Cases , 1-25.
Appendices
Projected Income Statement
| Income Statement Year 1 | |
| Annual Totals | |
| Revenue | |
| Total Revenue | $ 65,495,000,000 |
| Cost of Goods Sold | |
| Total Cost of Goods Sold | $ 7,350,000,000 |
| Gross Margin | $ 58,145,000,000 |
| Payroll | $ 6,980,750,424 |
| Income (Before Other Expenses) | $ (6,980,750,424) |
| Other Expenses | |
| Amortized Start-up Expenses | $ - |
| Depreciation | $ 3,578,571,429 |
| Interest | |
| Commercial Loan | $ 1,090,201,033 |
| Commercial Mortgage | $ - |
| Credit Card Debt | $ - |
| Vehicle Loans | $ - |
| Other Bank Debt | $ - |
| Line of Credit | $ 353,886,238 |
| Bad Debt Expense | $ - |
| Total Other Expenses | $ 5,022,658,699 |
| Net Income Before Income Tax | $ (12,003,409,123) |
| Income Tax | $ 3,400,000 |
| Net Profit/Loss | $ (12,003,409,123) |
Projected Balance Sheet
| Balance Sheet Years 1-3 | |||
|
Company Name: |
|||
|
Target Corporation |
|||
| ASSETS | First Year | Second Year | Third Year |
| Current Assets | |||
| Cash | - | - | - |
| Accounts Receivable | 63,358,000,000 | 40,778,000,000 | 14,088,000,000 |
| Inventory | 8,000,000,000 | 8,000,000,000 | 8,000,000,000 |
| Prepaid Expenses | - | - | - |
| Other Initial Costs | - | - | - |
|
Total Current Assets |
$71,358,000,000 | $ 48,778,000,000 | $ 22,088,000,000 |
| Fixed Assets | |||
| Real Estate -- Land | - | - | - |
| Real Estate -- Buildings | - | - | - |
| Leasehold Improvements | - | - | - |
| Equipment | 24,000,000,000 | 24,000,000,000 | 24,000,000,000 |
| Furniture and Fixtures | - | - | - |
| Vehicles | - | - | - |
| Other | 750,000,000 | 750,000,000 | 750,000,000 |
|
Total Fixed Assets |
$24,750,000,000 | $ 24,750,000,000 | $ 24,750,000,000 |
| (Less Accumulated Depreciation) | $ 3,578,571,429 | $ 7,157,142,857 | $ 10,735,714,286 |
| Total Assets | $ 92,529,428,571 | $ 66,370,857,142 | $ 36,102,285,714 |
| LIABILITIES & EQUITY | |||
| Liabilities | |||
| Accounts Payable | 7,350,000,000 | 7,350,000,000 | 7,350,000,000 |
| Commercial Loan Balance | 11,362,433,438 | 9,866,579,698 | 8,230,404,561 |
| Commercial Mortgage Balance | - | - | - |
| Credit Card Debt Balance | - | - | - |
| Vehicle Loans Balance | - | - | - |
| Other Bank Debt Balance | - | - | - |
| Line of Credit Balance | 9,792,404,257 | 21,846,070,344 | 37,507,479,562 |
|
Total Liabilities |
$28,504,837,695 | $ 39,062,650,042 | $ 53,087,884,122 |
| Equity | |||
| Common Stock | 19,000,000,000 | 19,000,000,000 | 19,000,000,000 |
| Retained Earnings | (12,006,809,123) | (26,143,192,900) | (43,746,998,408) |
| Dividends Dispersed/Owners Draw | - | - | - |
|
Total Equity |
$ 6,993,190,877 | $ (7,143,192,900) | $ (24,746,998,408) |
| Total Liabilities and Equity | $ 35,498,028,571 | $ 31,919,457,142 | $ 28,340,885,714 |
Projected Cash Flow Statement
| Cash Flow Forecast Years 1-3 | |||||||||||||||
| Year 1 Totals | Year 2 Totals | Year 3 Totals | |||||||||||||
| Beginning Balance | |||||||||||||||
| Cash Inflows | |||||||||||||||
| Cash Sales | $11,580,000,000 | $ 12,580,000,000 | $ 13,690,000,000 | ||||||||||||
| Accounts Receivable | $9,790,000,000 | $ 10,000,000,000 | $ 13,000,000,000 | ||||||||||||
| Total Cash Inflows | $21,370,000,000 | $ 22,580,000,000 | $ 26,690,000,000 | ||||||||||||
| Cash Outflows | |||||||||||||||
| Investing Activities | |||||||||||||||
| New Fixed Asset Purchases | $ - | $ - | $ - | ||||||||||||
| Additional Inventory | $ - | $ - | $ - | ||||||||||||
| Cost of Goods Sold | $ - | $ - | $ - | ||||||||||||
| Operating Activities | |||||||||||||||
| Operating Expenses | $ - | $ - | $ - | ||||||||||||
| Payroll | $6,980,750,424 | $ 8,376,900,509 | $ 10,889,970,661 | ||||||||||||
| Taxes | $ - | $ - | |||||||||||||
| Financing Activities | |||||||||||||||
| Loan Payments | $2,457,767,595 | $ 2,457,767,595 | $ 2,457,767,595 | ||||||||||||
| Owners Distribution | $ - | $ - | $ - | ||||||||||||
| Line of Credit Interest | $353,886,238 | $ 1,218,997,983 | $ 2,313,670,961 | ||||||||||||
| Line of Credit Repayments | $ - | $ - | $ - | ||||||||||||
| Dividends Paid | $ - | $ - | $ - | ||||||||||||
| Total Cash Outflows | $9,792,404,257 | $ 12,053,666,087 | $ 15,661,409,218 | ||||||||||||
| Net Cash Flows | ($9,792,404,257) | $ 10,526,333,913 | $(15,661,409,218) | ||||||||||||
| Operating Cash Balance | |||||||||||||||
| Line of Credit Drawdown | $9,792,404,257 | $ 12,053,666,087 | $ 15,661,409,218 | ||||||||||||
