ANNUAL REPORT PROJECT FOR THE TARGET CORPORATION (SEE APPENDIX B FOR THE TARGET ANNUAL REPORT) Targets 2011, 2012, and 2013 financial statements have been loaded in an Excel spreadsheet which is available in the Connect library. The income statement in the spreadsheet has been revised to better reflect the income statement format and wording used in the course textbook. The revision moves credit card revenues (interest income) to the nonoperating section and enables the project solution for gross margin percentages to agree with those identified in the Management Discussion & Analysis section of the annual report. This Excel spreadsheet provides an excellent starting point for the vertical and horizontal analysis required in the project. Please note: All references to the companys year-end data pertain to the fiscal year-end. For example, the companys 2013 financial statements are dated February 1, 2014, which is the companys fiscal closing date. Likewise, the 2012 financial statements apply to the fiscal year-ending February 2, 2013. Company Overview and Managements Discussion and Analysis The annual report for Target Corporation opens with a general description of business operations, risk factors, stock market registration, and selected financial data. This is followed by Managements Discussion and Analysis of Financial Condition, in which management talks about financial results, including segment results, liquidity, and other matters deemed necessary to provide adequate disclosure to users of the report. Refer to these items to answer Questions 16. What are the companys two reportable operating segments? Identify at least five risk factors for Target. On what stock market exchange is the companys stock traded? What is Targets symbol? Describe the data breach that occurred during the fourth quarter of 2013 and its effect on profits. According to the Consolidated Statements of Operations, sales increased from $71,960 million in 2012 to $72,596 million in 2013. However, according to the U.S. Segment information, sales in the U.S. declined during that same time period. Identify the contributing factors for the declining 2013 U.S. sales and also explain how overall sales increased during 2013. When discussing its liquidity, management indicated that cash provided by operations in 2013 was $6,520 million. How did the company utilize these funds? The same section reports that Target sold its U.S. credit card portfolio. How did the company utilize these funds? Page 769 Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements (Auditors) What is the name of the companys independent auditors? Who is responsible for the financial statements? What is the outside auditors responsibility? What type of opinion did the independent auditors issue on the financial statements (unqualified, qualified, adverse, or disclaimer)? What does this opinion mean? The auditors report indicates the audit was concerned with material misstatements rather than absolute accuracy in the financial statements. What does material mean? Income StatementVertical Analysis Using Excel, compute common-size income statements for all three fiscal years. In common-size income statements, net sales is 100 percent and every other number is a percentage of sales. Attach the spreadsheet to the end of this project. (To help you get started, you can find Targets financial statements in Excel format in the Connect library. The financial statements have been slightly reformatted to conform to the multi-step income statement format utilized throughout the textbook.) Using the common-size income statements, identify the significant trends. What was the gross margin (gross profit) and the gross margin percentage for fiscal years 2013, 2012, and 2011? If the gross margin percentage changed over the three-year period, what caused the change? (Hint: Changes in either the numerator or denominator reveal what caused the change in the gross margin percentage.) What was the percentage return on sales for fiscal years 2013, 2012, and 2011? What do these ratios indicate about Target? Income StatementHorizontal Analysis Using Excel, compute annual changes for each line item on the income statement. For each of the two most recent years, insert a column for changes in absolute dollars and insert another column for the percentage changes. Attach the spreadsheet to the end of this project. (You can find Targets financial statements in Excel format in the Connect library.) What were the absolute dollar and the percentage changes in revenues between fiscal years 2013 and 2012 and between 2012 and 2011? Describe the trend in revenues. Be specific (e.g., slight/steady/drastic increase or decrease each year, or fluctuating with an initial modest/significant increase or decrease followed by a modest/significant increase or decrease, etc.) to precisely describe the companys situation. What were the absolute dollar and the percentage changes in cost of sales (cost of goods sold) between fiscal years 2013 and 2012 and between 2012 and 2011? Describe the trend in cost of sales (cost of goods sold). Be specific (e.g., slight/steady/drastic increase or decrease each year, or fluctuating with an initial modest/significant increase or decrease followed by a modest/significant increase or decrease, etc.) to precisely describe the companys situation. What were the absolute dollar and the percentage changes in selling, general, and administrative expenses (operating expenses) between fiscal years 2013 and 2012 and between 2012 and 2011? Describe the trend in selling, general, and administrative expenses. Be specific (e.g., slight/steady/drastic increase or decrease each year, or fluctuating with an initial modest/significant increase or decrease followed by a modest/significant increase or decrease, etc.) to precisely describe the companys situation. Page 770 What were the absolute dollar and the percentage changes in net income between fiscal years 2012 to 2013 and 2011 to 2012? How would you describe the trend for net income? Be specific (e.g., slight/steady/drastic increase or decrease each year, or fluctuating with an initial modest/significant increase or decrease followed by a modest/significant increase or decrease, etc.) to precisely describe the companys situation. Do you expect the trend to continue? Which items had the largest percentage change from 2011 through 2013, revenues or expenses (such as selling, general, and administrative expenses or cost of sales)? Summarize what is causing the changes in net income from fiscal year 2011 to 2012 and 2012 to 2013 based on the percentages computed in Questions 18 through 26. Do you expect the trend to continue? Balance SheetVertical Analysis Using Excel, compute common-size balance sheets for the years ended February 1, 2014, and February 2, 2013. In common-size balance sheets, total assets is 100 percent and every other number is a percentage of total assets. Attach the spreadsheet to the end of this project. (You can find Targets financial statements in Excel format in the Connect library.) Current assets constituted what percentage of total assets at February 1, 2014, and February 2, 2013? Which current asset had the largest balance at each fiscal year-end? Long-term assets constituted what percentage of total assets at February 1, 2014, and February 2, 2013? (Note: solutions for percentages calculated for items 29 and 30 should total 100 percent.) Which long-term asset had the largest balance at each fiscal year-end? Current liabilities constituted what percentage of total assets at February 1, 2014, and February 2, 2013? Which current liability had the largest balance at each fiscal year-end? Long-term liabilities constituted what percentage of total assets at February 1, 2014, and February 2, 2013? Which long-term liability had the largest balance at each fiscal year-end? Calculate the ratio of total liabilities to total assets on February 1, 2014, and February 2, 2013. Calculate the ratio of stockholders equity to total assets on February 1, 2014, and February 2, 2013. (Recall percentages for items 33 and 34 should total 100 percent.) Identify whether Target finances its assets mostly with debt or equity. Balance SheetHorizontal Analysis Using Excel, compute annual changes for each line item on the balance sheet. Insert a column for changes in absolute dollars and insert another column for the percentage changes. Attach the spreadsheet to the end of this project. (You can find Targets financial statements in Excel format in the Connect library.) What was the absolute dollar and the percentage change between the February 1, 2014, and February 2, 2013, credit card receivables balances? Was the change an increase or decrease? What line item (account) on the income statement is normally directly related to accounts receivable? What happened to Targets credit card receivables? How was this event reported on the 2013 income statement? What was the absolute dollar and the percentage change between the February 1, 2014, and February 2, 2013, balances for inventory? Was the change an increase or decrease? What line item (account) on the income statement is directly related to inventory? Did this account change in a similar direction as inventory? Page 771 Compared to the February 2, 2013, balances, did the amounts reported for the following long-term assets increase or decrease? By how much? Include dollar amounts for each item. What line item on the income statement is directly related to long-term assets? Did this account change in a similar direction as long-term assets? What were the absolute dollar and the percentage change between the February 1, 2014, and February 2, 2013, amounts for total liabilities? Was the change an increase or decrease? What line item (account) on the income statement is directly related to the largest of these liabilities? Did this account change in a similar direction as total liabilities? What was the amount of the change in the balance in retained earnings between February 1, 2014, and February 2, 2013? What caused this change? Balance SheetRatio Analysis Compute the current ratio at February 1, 2014, and February 2, 2013. What does this ratio indicate about Target? Calculate the accounts receivable turnover and the average number of days to collect accounts receivable for the years ended February 1, 2014, and February 2, 2013. In which year was the turnover and days to collect receivables more favorable? Calculate the inventory turnover ratios and the average number of days to sell inventory for the years ended February 1, 2014, and February 2, 2013. In which year was the turnover and days to sell inventory more favorable? Balance SheetStockholders Equity Section Does the companys common stock have a par value? If so, how much was the par value per share? How many shares of common stock were issued as of February 1, 2014, and February 2, 2013? How many shares of treasury stock did the company have as of February 1, 2014, and February 2, 2013? How were the treasury stock purchases reflected on the statement of cash flows? Include the type of cash flow activity. What percentage of stockholders equity do the following items represent at each year-end (February 1, 2014, and February 2, 2013)? Page 772 Statement of Cash Flows Does Target report cash flows from operating activities using the direct or the indirect method? Describe how you can tell. What was the dollar amount of the increase or decrease in cash and cash equivalents for the fiscal years 2013, 2012, and 2011? Does the ending balance of cash and cash equivalents agree with the amount reported on the balance sheet for years ended February 1, 2014, and February 2, 2013? Target reported a $6,520 million cash flow provided by operations in 2013. Identify the four largest cash flows for that year. Does this agree with managements comments identified in Question 6? On what statement(s) would you expect to find information regarding the declaration and payment of dividends? Did the company declare or pay dividends in 2013?