Question

1. What is the inventory method used by Target? Is it consistent with IFRS?

2. In addition to the purchase price, are there any additional items included in the unit cost?

3. It has been said that the Industry Gross Profit (GP) ratio is about 25.0% and Inventory Turnover (IT) ratio is about 7.2 times.

What is Target’s GP and IT ratios trend from 2014 to 2017? How did the company perform compared with the Industry?

Answer 1

1.
Target values its inventory at lower of cost or market. It is reduced by anticipated losses or shrinks or markdowns. It is NOT consistent with the IFRS, IFRS states that inventory should be valued at cost or net realizable value, whichever is lower but Target uses GAAP that specifies market value instead of NRV.

Also, Target uses LIFO (last in first out) method, whereas IFRS forbids the use of LIFO. It is inconsistent with the specifications of the IFRS.

2.
Yes in addition to the purchase price, the following is included in the Cost of Sales

-Inventory write-offs
-Freight expenses
-Outbound shipping and handling costs
-Distribution center costs
-Import costs
-All related depreciation expenses

3. GP Margin

		2017	2016	2015
Sales	A	$ 71,879	$ 69,495	$ 73,785
Gross Margin	B	20,754	20,350	21,544
GP Ratio	B / A	28.9%	29.3%	29.2%

As it can be seen Target has performed better than the industry average.

For inventory turnover, I have used Sales (alternatively, COGS can be used as well). TGT's ratio is in the range of 5-6 times. It is a little lower than the industry average. A higher ratio would have indicated a better position