Question

Hello,

I need some help with the following Business Application Case – Target. I want to make sure that my answers to the questions are correct. Would you please provide me with the step by step solutions and show me how you approach to the result. Please provide me with your calculations and use Target’s 2017 Fiscal Year.

Thanks,

Use the Target Corporation Form 10-K to answer the following questions related to Target’s 2017 Fiscal Year. Note that Target’s Fiscal Year ends in late January or early February, so the 2017 Fiscal Year ends February 3, 2018. You will need to use the financial statements as well as notes to the financial statements to answer the questions. Show your calculations.

1. What percentage of Target’s total revenues end up as net earnings? (Hint: use the Statement of Operations)
2. What percentage of Target’s sales go to pay for the costs of the goods being sold? (Hint: use the Statement of Operations)
3. Calculate the Cost of Sales and the Gross Margin as a percentage of Target’s Sales for the 2017, 2016 and 2015 Fiscal Years. Comment on the changes and the significance of changes in these ratios. (Hint: use the Statement of Operations)
4. What costs does Target include in its Cost of Sales account? (Hint: use the Notes to the Financial Statements starting on page 40 of the 10-K)
5. When does Target recognize revenue from the sale of gift cards? (Hint: use the Notes to the Financial Statements starting on page 40 of the 10-K)

Answer 1

(a): Target’s total revenue for 2017 = $71,879 million. Net earnings = $2,934 million. Thus % = 2934/71879 = 4.08%

(b): Cost of goods sold = $51,125 million. Thus % = 51125/71879 = 71.13%

(c):

	2017	2016	2015
Sales	71,879.00	69,495.00	73,785.00
Cost of sales	51,125.00	49,145.00	52,241.00
Gross margin	20,754.00	20,350.00	21,544.00
Cost of sales as a % of sales	71.13	70.72	70.80
Gross margin as a % of sales	28.87	29.28	29.20

We can see that cost of goods sold is increasing each year as a percentage of sales and this is being reflected in the decline in gross margin that took place in 2018.

(d): Cost of sales include total cost of products sold (this includes the freight costs associated with moving goods from vendor premise to Target's retail stores, income of the vendor that is not in the form of reimbursement of specific costs), shrinkage of inventory, markdowns, cash discounts that are part of credit terms, distribution center costs and import costs.

(e): Revenue from gift cards are recognized when the gift card is redeemed. Target's gift cards do not expire and it is only on redemption that they recognize revenue.