Finance

Understanding the Notes to the Balance Sheet Discussion:

 

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Your friend, Liz, loves to shop at Target  and is now interested in investing in the company. Tom, another friend,  has told her that Target’s debt structure is risky with obligations of  nearly 74% of total assets. Liz sees that debt on the balance sheet is  65% of total assets and is confused by Tom’s comment. Write an  explanation to Liz discussing the debt structure of Target and why Tom  thinks Target is risky. Be sure to explain clearly what information  appears on financial statements, as well as what information does not  appear directly on the financial statements. Use the information below  in your discussion.

At fiscal year-end February 2, 2008,  Target Corporation had the following assets and liabilities on its  balance sheet (in millions):

Current liabilities $11,782   Long-term debt 15,126   Other liabilities 2,345   Total assets 44,560

Target reported the following information on leases in the notes to the financial statements:

Total rent expense was $165 million in  2007, $158 million in 2006, and $154 million in 2005, including  percentage rent expense of $5 million in 2007, 2006, and 2005. Most  long-term leases include one or more options to renew, with renewal  terms that can extend the lease term to more than 50 years. Certain  leases also include options to purchase the leased property.

Future minimum lease payments required under non-cancellable lease agreements existing at February 2, 2008, were:

Future Minimum Lease Payments (in Millions) Operating Leases Capital Leases   2008 $ 239 $  12   2009   187   16   2010   173   16   2011   129   16   2010   123   17   After 2010 2, 843   155   Total future minimum lease payments $3694 (a) $232   Less: Interest (b)   (105)   Present value of minimum capital lease payments  $127 (c)

(a) Total contractual lease payments  include $1,721 million related to options to extend lease terms that are  reasonably assured of being exercised, and also include $98 million of  legally binding minimum lease payments for stores that will open in 2008  or later.
(b) Calculated using the interest rate at inception of each lease.
(c) Includes current portion of $4 million.

Respond to at least two of your classmates’ posts.

References for week:

 

Required Resources

Text

Epstein, L. (2014). Financial decision making: An introduction to financial reports [Electronic version]. Retrieved from https://content.ashford.edu/

  • Chapter 2: The Balance Sheet

Articles

Ford Motor Company. (2014). Ford Motor Company 2012 annual report (Links to an external site.)Links to an external site..  Retrieved from  http://corporate.ford.com/content/dam/corporate/en/investors/reports-and-filings/Annual%20Reports/2012-annual-report.pdf

Harper, D. (n.d.). Financial statements: The system (Links to an external site.)Links to an external site.. Investopedia. Retrieved from http://www.investopedia.com/university/financialstatements/financialstatements2.asp

REPLY TO EDWARDS DISCUSSION BELOW:

 

Liz is confused by Tom’s comment because she did not take into fact  what is mentioned in the note section on the balance sheet regarding  future obligations. “Long-term debt—current maturities shows the amount  the company will have to pay on the interest and principal due in the  next 12 months for long-term debt borrowings” (Epstein, 2014, p. 2.1).  On Target’s 2008 balance sheet it shows within the note section about  their future lease payments from 2008 to 2011 and the amount totals to  3694(millions). Not to mention that the minimum payments for each year  are only listed, which means the leasing payments could be higher. The  note section mentions the capital lease expense as well which are the  finance charges applied from the property owner.

These financial statistics listed in the note section are not counted  into the company’s long-term debt because the leasing and financing  amounts for each year because they are not at a fixed rate. If the  properties were to be purchased it could then be added on to the balance  sheet listed under the short and long-term debt. Liz only counted the  current liabilities, debt and assets, which the assets clearly state  that they outweigh company debts. Once she accumulates the current  minimum lease obligations, she will realize that Target’s obligations  can be higher than the 74 percent number that Tom projected.

References

Epstein, L. (2014). Financial decision making: An introduction to financial reports. Retrieved from https://content.ashford.edu/books/AUOMM622.14.1/sections/sec1.3?search=equity#w10704 (Links to an external site.)

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