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 available here. This material also is available under the Investor Relations link at the company’s website (www.target.com). Target does not have investments in stock or bonds. However, CVS Health Corp., which purchased Target’s pharmacy and clinical business during 2015, does have some investments. Access CVS’s 2017 10K (issued on February 14, 2018) at investors.cvshealth.com to answer the following questions.

Required:
1. CVS indicates in Note 1 that it has some short-term investments that consist of certificates of deposit (CDs).

1. How has CVS classified those CDs for accounting purposes?

2. Per CVS’s balance sheet, what was the balance in CVS’s short-term investments as of December 31, 2017, and December 31, 2016?

3. Per CVS’s statement of cash flows, what cash transactions affected short-term investments during 2017?

2. Per Note 1, CVS has equity-method investments in SureScripts, LLC, and in Heartland Healthcare Services. CVS indicates that those investments are immaterial for the year ended December 31, 2017. Assuming that the Heartland investment is material,

1. How would Heartland’s earnings affect CVS’s income statement?

2. How would Heartland’s earnings affect CVS’s balance sheet?

Answer 1

1. CDs has been classified as short-term investment and carried at fair value using level 1 hierarchy. Fair value approximates to the historical cost on the balance sheet date. The Company’s short-term investments consist of certificates of deposit with initial maturities of greater than three months when purchased that mature in less than one year from the balance sheet date.

As on 31 March 2017-$111 million and as on 31 March 2016- $87 million was cash balance.

Purchase and collection of matured amount from CDs has affected the cash flows as per cash flow statement.

2. Under equity method, a Company accounts for its share in profit or loss incurred by the investee to the extent of its investment and other contractual or constructive obligation with corresponding increase/decrease in the investment in balance sheet.

Since, the details of profit or loss incurred by Heartland and SureScripts has not been furnished, it would be difficult to comment whether investment would have increased or decreased.