ACC 610 Final Project

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Jan 9, 2024

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Final Project Rose M Wright Southern New Hampshire University ACC 610 Financial Reporting Professor Cullinan November 19, 2023

Conceptual Framework

Conceptual Framework of Financial Reporting provides the fundamental concepts, objectives, definitions, and principles of financial reporting. The credibility of financial will enhance with the objectives and concepts when they are being used to provide direction and structure for the financial accounting and reporting. The framework is going to help with leading the development of standards that are internally consistent and consistent with each other. This allows preparers and users of financial statements to benefit from financial statements based on accounting requirements. This provides Target with the basic reasoning on which to consider the merits of an alternative solution with complex financial accounting or reporting problems. The following information would be of interest to the creditors for Target. The balance sheets. The balance sheet is going to show the creditors risk, financial flexibility, liquidity, solvency, and operating capacity. Other helpful information is the disclosure statement for the creditors, the disclosure of critical accounting estimates. This explains the methods adopted by Target to their value inventory, receivable and long-term assets. All this information will show the creditors the assets, liabilities, and equity in the company. The balance sheet has the information that the bank will want to see if Target is trying to get additional credit. Also, it will be useful to the creditors to see if Target is using the right methods to value their assets and if the assets are being presented in the financial statements. The following information would be of interest to the investors. Just like the creditors, the balance sheet would be of interest to the investors. It will show the investors the value of the assets that they have invested in Target sufficient or not sufficient. The information is going to help the investors to see the status of the liabilities of Target and the market risk that Target could be facing.

Analysis of Financial Statements Ratios capture relationships between and among items on financial statements. They are useful indicators of the financial position and performance, serving as performance metrics to evaluate a company’s results over time and against its competitors. These ratios reveal insights into a company’s return on investments, risk, financial flexibility, liquidity, and operating capability (Wha13). Liquidity ratios are an indicator of the company’s ability to be able to meet their current maturing obligations. To calculate the ratio, we take the current assets and divide it by the current liabilities. Target current ratio from 2020 to 2021 increased from 0.89 in 2020 to 1.03 in 2020 but declined in 2022 to 0.99 and then increased in 2023 to 0.91. Next, quick ratio is a combination of the company’s current assets that can convert into cash within 90 days (cash and equivalents, short-term investment securities and receivables) divided by current liabilities. Target quick ratio increased from .26 in 2020 to 0.50 in 2021 then it decreased in 2022 to 0.35 and decreased in 2023 to 0.22. The rate of return on investment is how profitable a company is using their resources. ROE is a profitability ratio that is calculated as net income divided by shareholders’ equity. Target ROE in 2020 was 0.28 and increase slightly in 2021 to 0.30 in 2022 it increased to 0.54 and then decreased in 2023 to 0.25. Next, the return on assets measures the profitability of Target using their assets and computed at net income divided by total assets. Target ROA decreased from 0.25 in 2020 to 0.21 in 2021 in 2022 it increased to 0.32 and then decreased to 0.15 n 2023(Nasdaq 2023). The decline in the current ratio is due to the increase in short-term debt, a decrease in current assets, or a combination of both. When there is a decline in ratio it is because there was a

reduction in the ability to generate cash. In other words, a decreasing quick ratio is more than likely because they are struggling to maintain or grow in their sales, paying bills right away or not collecting their receivables in a manner time. If there is an increase in quick ratio, they are experiencing top-line growth, converting receivable into cash, and have no problem with their financial obligations. Companies have faster inventory turnover and cash conversion cycles. Having a higher quick ratio, the better liquidity position. The cash flow reports cash that is coming in and out and shows how the net changes in cash flow from the operating, investing, and financing activities during the accounting period reported. There are three important sections on the cash flow statements. The operating activities, investing activities, and financing activities. Operating activities have net cash from all the entities, this includes those of the discontinued operations of the reporting entity. This involves producing and delivering goods and providing services. Operating activity cash flow will have the transactions, adjustment, and changes in value not defined as part of investing or financing activities. Target cash provided by operating activities increased from 2020 to 2021 from $7,711,000 to $10,525,000 decreased to $8,625,000 in 2022 and decreased to $4,018,000 in 2023. Investment activity in 2020 was –$2,944,000, -$2,591,000 in 2021, -$3,150,000 in 2022 and -$5,504,000 in 2023. Financing activities in 2020 -$3,152,000, 2021 -$2,000,0000, 2022 - $8,071,000 and 2023 -$82,196,000 (Nasdaq 2023). The reason for the changes is due to the investments that are driving the growth in the merchandise, stocks, and receipts of certain merchandise. The first entry on the cash flow statement, net income is one of the major factors that will cause a decrease in cash flow from operation activities from on period to the next. Next, net income will reflect the sales and

expenses of Target in any given period and will provide the investors an information that shows how Target performs. The decreasing of sales or margin shows a negative impact on their profitability. Sales can be seen as an undesirable impact with the change of economic conditions, loss of pricing, product life or poor operational execution. This can be attributed to the declining demand in the economy, new competitors, and marketing. Cash management is critical for any company to be successful. Cash consists of cash on hand, unrestricted funds deposited, negotiable check, and bank drafts. Cash equivalents are the short-term, and highly liquid investments. Cash equivalents have maturity dates of three months or less. Cash can consist of petty cash, checking, savings and money market accounts (Whalen, 2013). Target cash and cash equivalents increased from $2,577,000 in 2020 to $8,511,000 in 2021 and then decreased to $5,911,000 in 2022 and $2,229,000 in 2023(Nasdaq 2023). The reason for the change is that the amount of cash and cash equivalents for a company is important and a large component for their overall operating strategy. A company that has considerable amounts of cash and cash equivalents shows that they will be able to go through challenging times if their sales are low or their expenses are high. The valuation method that Targets uses is the retail inventory method. The retail inventory method accounts for their inventory and cost of sales. For this method, inventory is stated at cost using the last-in, first-out (LILO) method by applying the cost to retail ratio for each merchandise ending retail value. By using the valuation method any company will benefit from their inventory cost and gross margin will be calculated by applying a cost to retail ratio for the retail value inventory. RIM is an average method that is widely used in the retail industry. This will benefit the

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