Question

The notes are an important part of a company’s financial statements, giving valuable details that would clutter the tabular data presented in the statements. This case will help you learn to use a company’s inventory notes.

Target Corporation’s Fiscal 2015 Annual Report

Use the Target Corporation financial statements and related notes, and answer the following questions:

1. Which inventory costing method does Target use? How does Target value its inventories? See Note 12.
2. By using the cost of goods sold formula, you can compute net purchases, which are not reported in the Target financial statements. How much were Target’s inventory purchases during the year ended January 30, 2016?
3. Determine Target’s inventory turnover and days’ sales in inventory for the year ended January 30, 2016. (Round each ratio to one decimal place.) How do Target’s inventory turnover and days’ sales in inventory compare with Kohl’s Corporation’s for the year ended January 30, 2016? Explain.

Answer 1

Answer:

Requirement 1

Inventories is accounted for under the last-in, first-out method and are stated at the lower of cost or market.

Requirement 2

Target's  net purchases of inventory were $52,316 (in millions) during the year ended January 30, 2016.

Calculations:

Beginning Inventory + Net Purchases - Ending Inventory = Cost of Goods Sold

Thus:

Net Purchases = Ending Inventory + Cost of Goods Sold - Beginning Inventory

= $8,601 + $51,997 - $8,282

= $52,316

(Dollar amounts in millions)

Requirement 3

For the fiscal year ended January 30, 2016, Kohl's Corporation had an inventory turnover of 3.12 times and days' sales in inventory of 117.0 days.

For the fiscal year ended January 30, 2016, Target's inventory turnover is 6.2 times, and days' sales in inventory is 58.9 days.

Kohl's inventory turnover (3.12 times) is lower than that of Target (6.2 times) and Kohl's days' sales in inventory (117.0 days) is higher than that of Target (58.9 days).  Both measures for Target compare favorably to Kohl's.  Target sold its average level of inventory more times than did Kohl's, and Target held its average inventory for a shorter time than did Kohl's.

Calculations:

Target

Fiscal year ended January 30, 2016 (in millions):

Average inventory	=	(Beginning inventory  + Ending inventory) / 2
	=	($8,282 + $8,601) / 2
	=	$8,441.5

Inventory turnover	=	Cost of goods sold  / Average inventory
	=	$51,997 / $8,441.5
	=	6.2 times for the year

Days' sales in inventory	=	365 days / Inventory turnover
	=	365 days / 6.2 times
	=	58.9 days