Two-Year-Ahead Forecasting of Financial Statement

Following are the financial statements of Target Corporation from its FY2015 annual report.

Target CorporationConsolidated Statements of Operations12 Months Ended$millionsJan. 30, 2016Jan. 31, 2015Feb. 01, 2014Sales76,78572,61871,279Cost of sales54,13351,27850,039Gross margin22,65221,34021,240Selling, general and administrative expenses15,28014,67614,465Depreciation and amortization2,2132,1291,996Gain on sale(620)-(319)Earnings from continuing operations before interest expense & income taxes5,7794,5355,170Net interest expense6078821,049Earnings from continuing operations before income taxes5,1723,6534,121Provision for income taxes1,681

1,2041,427Net earnings from continuing operations3,4912,4492,694Discontinued operations, net of tax42(4,085)(723)Net earnings (loss)3,533

(1,636)1,971

Target CorporationConsolidated Statements of Financial Position$millionsJan. 30, 2016Jan. 31, 2015AssetsCash and cash equivalents, inc. short-term investments of $3,008 and $1,520$4,046$2,210Inventory8,6018,282Assets of discontinued operations3221,058Other current assets1,1612,074Total current assets14,13013,624Property and equipment, net25,81725,952Noncurrent assets of discontinued operations75717Other noncurrent assets840879Total assets$40,862$41,172Liabilities and Shareholders' investmentAccounts payable$7,418$7,759Accrued expenses and other current liabilities4,2363,783Current portion of LT debt and other borrowings81591Liabilities of discontinued operations153103Total current liabilities12,62211,736Long-term debt and other borrowings11,94512,634Deferred income taxes8231,160Noncurrent liabilities of discontinued operations18193Other noncurrent liabilities1,8971,452Total noncurrent liabilities14,68315,439Shareholders' investmentCommon stock5053Additional paid-in-capital5,3484,899Retained earnings8,7889,644Accumulated other comprehensive lossPension and other benefit liabilities(588)(561)Currency translation adjustment and cash flow hedges(41)(38)Total shareholders' investment13,55713,997Total liabilities and shareholders' investment$40,862$41,172

We forecast Target's income statement using the following forecast assumptions for both years:

Sales (growth rate)10%Cost of sales/Sales70.5%Selling, general and administrative expenses/Sales19.9%Depreciation and amortization (% of prior year PPE, net)8.4%Net interest expenseNo changeProvisions for income taxes/Pretax income32.5%Assume Target disposes of the net assets from discontinued operations (assets less liabilities)in FY2016 for proceeds of $350 million.

Instructions:Forecast Target's fiscal year ended 2016 and 2017 income statements.

• Use the same forecasting assumptions for both years.
• Round forecasts to $ millions.
• Use rounded figures for subsequent forecast calculations.
• Do not use negative signswith your answers in the income statement.

Hint: Forecasted FY2016gain on sale is computed as proceeds from the disposal of net assets from discontinued operations minus net assets from discontinued operations ($350 million - $226 million). Forecast $0 for gain on sale in FY2017.

Target CorporationConsolidated Statements of Operations$ millionsFY2016 Est.FY2017 Est.Sales$Answer

$Answer

Cost of salesAnswer

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Gross marginAnswer

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Selling, general and administrative expensesAnswer

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Depreciation and amortizationAnswer

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Gain on saleAnswer

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Earnings from continuing operations before interest and taxAnswer

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Net interest expenseAnswer

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Earnings from continuing operations before taxAnswer

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Provisions for income taxesAnswer

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Net earnings$Answer

$Answer

We forecast Target's financials using the following forecast assumptions for both year:

Inventory/Sales11.7%Other current assets/Sales1.6%Other noncurrent assets/Sales1.1%Accounts payable/Sales10.1%Accrued and other current liabilities/Sales5.7%Deferred income taxes/Sales1.1%Other noncurrent liabilities/Sales2.6%CAPEX/Sales1.90%Dividends/Net income40.5%Common stockNo changeAdditional paid-in capitalNo changeAccumulated other comprehensive lossNo changeCurrent Maturities L-T Debt for 2016$751Current Maturities L-T Debt for 2017$2,251Current Maturities L-T Debt for 2018$201Assume Target buys back common stock at $2,000 million in FY2016 and retires the stock.

(Hint: Retained earnings are reduced by the cost of the stock buy back.) No stock buybacks happen in FY2017.

Instructions:Forecast Target's fiscal year ended 2016 and 2017 balance sheets.

• Use the same forecasting assumptions for both years.
• Round forecasts to $ millions.
• Use rounded figures for subsequent forecast calculations.
• Do not use negative signswith your answers in the income statement.

Target CorporationConsolidated Statements of Financial Position$ millionsFY2016 Est.FY2017 Est.AssetsCash and cash equivalents, inc. short-term investments$Answer

$Answer

InventoryAnswer

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Other current assetsAnswer

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Total current assetsAnswer

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Property and equipment, netAnswer

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Other noncurrent assetsAnswer

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Total assets$Answer

$Answer

Liabilities and Shareholders' investmentAccounts payable$Answer

$Answer

Accrued expenses and other current liabilitiesAnswer

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Current portion of LT debt and other borrowingsAnswer

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Total current liabilitiesAnswer

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Long-term debt and other borrowingsAnswer

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Deferred income taxesAnswer

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Other noncurrent liabilitiesAnswer

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Total noncurrent liabilitiesAnswer

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Shareholders' investmentCommon stockAnswer

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Additional paid-in capitalAnswer

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Retained earningsAnswer

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Accumulated other comprehensive lossAnswer

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Total shareholders' investmentAnswer

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Total liabilities and shareholders' investment$Answer

$Answer