Chapter 8: Audit Planning and Materiality

Target and Kohl's are chains of stores that cater to customers who desire name brand goods at lower prices. The SEC Form 10-K filing rules require management of US public companies to include background information about the business, as well as the most recent financial condition and results of operation. Access each company's most recent Form 10-K. These can be obtained through the SEC web site (www.sec.gov), or directly from the investor relations section of the Target (www.target.com) and Kohl's (www.kohls.com) web sites.

a. Read the description of each company's business in Part I, Item I of Form 10-K. Evaluate the similarity of each company as a basis for making financial comparisons.

b. Each company follows what is called a 52/53 week year in which the fiscal year ends on the Saturday nearest January 31. Given the nature of these companies, does a January 31 year-end make sense? Note that most public companies have a December 31 year-end.

c. Use the financial statements to calculate the gross margin percentage and the inventory turnover ratio for each company for the most recent year. Please include your calculations. Which company has the higher gross margin percentage? Which company has the higher inventory turnover?

d. Evaluation whether the relation between the gross margin percentage and inventory turnover makes sense given the description of each company's business.