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Analysis Of Financial Statements

Alexander, Apanyin

MBA 610: 5-2

The company chosen for the purpose of this assignment is Target Corporation. This part of the paper will use financial information of the company for the financial year 2019 and 2020. Some of the financial ratios that changed within the two years are quick ratio, price to earnings ratio, and current ratio. In 2019, the quick ratio of the company was 0.15 while in 2020, the quick ratio was 0.39. This increase in quick ratio was caused by an increase in sales turnover, early payment of liabilities, and quicker collection of debts. In 2019, the price to earnings ratio of the company was 16.47 while in 2020, the price to earnings ratio was 19.87. The increase in P.E ratio was as a result of low inflation and a growth in the general economy (Kenny, 2021). In 2019, the current ratio for Target Corporation was 0.81 while in 2020, the figure was 1.05. This improvement in current ratio was caused by reducing overhead expenses and paying off the company’s liabilities.

Over the two selected years, there are some figures on the financial statements that changed. For instance, in 2019, the company’s profit was $ 3.281 billion while in 2020, the company made a profit of $ 4.368 billion. This increase in profit was caused by growth in sales during the COVID-19 pandemic since many of the company’s customers were stocking up and buying goods from the company’s online stores (Afonso, Gasparetto & Bornia, 2021). Another figure from the financial statements that changed during the two years is sales. For 2019, the company’s sales amounted to $ 78.11 billion while in 2020, the company’s sales amounted to $ 92.400 billion. Increase in sales was as a result of increased shopping by customers during the pandemic and lockdown.

From the cash flow statements of the company, Target’s net operating cash flow was $ 5.973 billion and $ 7.117 billion for 2019 and 2020 respectively. The increase in net operating cash flow was caused by increase in accounts payable and increase in unearned revenues.

Net investing cash flow for 2019 was $ (3,416) billion and $(2,944) billion. The positive growth in net operating cash flow was as a result of increase in maturity of investment and sale of investments. Net financing cash flow for 2019 amounted to $ (3,644) billion and $ (3,152) billion in 2020. This was an increase caused by using of new equity and debt. From the financial statements of both 2019 and 2020, the accounts receivable account balance has been changing. In 2019, the accounts receivable account balance was $1.1 billion while in 2020, the accounts receivable balance was $962 million. This represented a reduction of 12.55% from the previous years (Catana & Toma, 2021). The reduction in the accounts receivable accounts balance for Target Corporation in 2020 was caused by collection of old accounts. This implies that some of the credit sales that the company had made in previous years had eventually been converted into cash sales.

Target Corporation uses the Last In, First Out (LIFO) method of valuing inventory. When used for making accounting statements, the company values its inventory at the lower of market cost or LIFO. The objective of doing this is to ensure the company manages to keep its numbers as conservative as possible. When using LIFO, the company’s cost of goods sold is higher compared to when valued using other methods such as FIFO, meaning that the Net Income will also be lower (Afonso, Gasparetto & Bornia, 2021). One of the advantages of using LIFO is that during times when prices are rising, the company finds it beneficial to use LIFO compared to FIFO. Secondly, LIFO enables the company to gain a tax advantage since the method makes the assumption that the inventory that was acquired most recently is the one that was sold (Kenny, 2021). As inflation keeps rising, the LIFO method continues to produce a high cost of goods sold as well as a lower amount of inventory balance. The higher cost of goods sold leads to a smaller tax liability since it results to a lower amount of net income.

To keep up with industry trends, Target Corporation came up with a strategy that they termed as Target Forward. This is the company’s new sustainability strategy which will enable it to impact positively on people and stay ahead of rival companies in all aspects by the year 2040. To fight competitors such as Walmart and Amazon, Target plans to offer products at lower prices and ensure that its products are more augmented and differentiated. This is especially for the home and apparel categories. Further, as the world continues to fight the COVID-19 pandemic, Target plans to remodel over 200 of its stores with a stronger focus on ease of use and safety (Catana & Toma, 2021). This will entail the enactment additional contactless features and create more room for social distancing. In the year 2022, the company estimates that its net revenues will rise to $104.51B. This will be achieved through a combination of strategies such as investing an additional $4 billion in expansion, introducing new product lines, and increasing sales on fixed store bases.

References

Afonso, P., Gasparetto, V., & Bornia, C. (2021, February). Analysis of the Perceptions on Target

Costing Using a Pedagogical Case Study. In International Joint conference on Industrial Engineering and Operations Management (pp. 373-386). Springer, Cham.

Catana, Ş., & Toma, S. G. (2021). Retail industry-marketing strategies for the competitive

business environment. Manager, (33), 7-14.

Kenny, J. (2021). Activist Investment Target Selection: A Mixed-Method Approach (Doctoral

dissertation).