Accounting Question

Target’s Inventory Method

Copy of Target’s 10-k Footnotes for year ended January 28th 2012

Just like Wal-Mart (one of Targets biggest competitors) and other retail

companies, Target uses the last in, first out (LIFO) inventory accounting method.

When calculated for accounting statement purposes, the inventory is valued at the

lower of LIFO or market cost. This is done to insure that the numbers are as

conservative as possible. LIFO values Target’s Cost of Goods Sold (COGS) higher

than the other inventory accounting methods (FIFO and Average Cost) therefore Net

Income is lower with LIFO than with any other method.

Inventory is usually one of the largest current assets for retail companies so

it is very important that investors feel that these numbers are not inflated. This is

the basic reason for the popularity of LIFO. Also, Target updates its inventory

numbers every time a purchase is made through barcodes and scanning product

information directly into their master database when customers makes a purchases.

This makes it easy for them to use the perpetual accounting method and devote

more of their staff to customer service. Most retail companies find it accurate and

effective to use bar codes to easily keep track of merchandise.

Also disclosed in the footnotes is information about some of the special sales

contracts that Target makes with their suppliers/vendors. Target arranges contracts

with vendors/suppliers whereby they do not pay for the merchandise until it is sold.

Merchandise in the stores that are under those contracts is not recorded as

inventory; instead the profits and cost of these items are consolidated under the

Consolidated Statement of Financial Position. So in effect Target has merchandise on

it’s shelves that does not belong to the company or does not affect any inventory

numbers. The sales received from these types of contracts are mentioned in the

footnotes. They also show in the footnotes the sales that they actually accumulated

from these kinds of contracts. So, shareholders and potential investors can see that

the inventory numbers presented on the balance sheet is not a complete

representation of the total amount of merchandise that the company has available

to sell.