Question

Target Corporation prepares its financial statements according to U.S. GAAP. Target's financial statements and disclosure notes for the year ended February 3, 2018, are - This material also is available under the Investor Relations link at the company's website.
1. On what line of Target's income statement is revenue reported? What was the amount of revenue Target reported for the fiscal year ended February 3, 2018? 2. Disclosure Note 2 indicates that Target generally records revenue in retail stores at the point of sale. Does that suggest that Target generally records revenue at a point in time or over a period of time? Explain. 3. Disclosure Note 2 indicates that customers ("guests") can return some merchandise within 90 days of purchase and can return other merchandise within a year of purchase. How is Target's revenue and net income affected by returns, given that it does not know at the time a sale is made which items will be returned? 4. Disclosure Note 2 indicates that "Commissions earned on sales generated by leased departments are included within sales and were $44 million ... in 2017." Do you think it likely that Target is accounting for those sales as a principal or an agent? Explain.
5. Disclosure Note 2 discusses Target's accounting for gift card sales. Does Target recognize revenue when it sells a gift card to a customer? If not, when does it recognize revenue? Explain. 6. Disclosure Note 4 discussed how Target accounts for consideration received from vendors, which they call "vendor income." Does that consideration produce revenue for Target? Does that consideration produce revenue for Target's vendors? Explain.

Answer 1

Answer:

Requirement 1

Target reports Sales revenue of $71,879 million for the 2017 fiscal year, which ended February 3, 2018.

Requirement 2

Recording revenue at the point of sale indicates that Target records revenue at the point in time that customers receive goods or services. That is the point in time that Target has fulfilled its performance obligation to deliver goods to customers.

Requirement 3

Target estimates returns as a percentage of salesbased on historical return patterns, and only includes net sales (reduced for estimated returns) in its income statement. Therefore, estimated returns reduce revenue and net income. Those estimates will be adjusted to reflect actual returns over time.

Requirement 4

It appears likely that Target is accounting for those arrangements as an agent, because it is including “commissions earned on sales generated by leased departments” within sales. If Target were accounting for those arrangements as a principal, it would include gross revenue for those arrangements in sales.

Requirement 5

When a gift card is sold, Target recognizes a deferred revenue liability rather than revenue, because it has not yet delivered goods or services to a customer. Target will reduce the deferred revenue liability and recognize revenue either when the gift card is redeemed or when, based on historical experience, Target judges it to be “broken”, meaning that Target does not believe the gift card will ever be redeemed.

Requirement 6

Target indicates that “Vendor income reduces either our inventory costs or SG&Aexpenses based on the provisions of the arrangement. Under our compliance programs, vendors are charged for merchandise shipments that donot meet our requirements (violations), such as late or incomplete shipments. These allowancesare recorded when violations occur. Substantiallyall consideration received is recorded as a reduction of cost of sales.” Thus, vendor income is really a refund of some of the amount that Target is paying for goods or services. It reduces Target’s costs, and so does not affect Target’s revenue. Likewise, because Target’s cost is the same as the vendor’s revenue, these refunds serve to reduce vendors’ revenue.