Target Corp. (TGT)

Financial Reporting Quality: Aggregate Accruals

Difficulty level: Advanced

Earnings can be decomposed into cash and accrual components. The accrual component (aggregate accruals) has been found to have less persistence than the cash component, and therefore (1) earnings with higher accrual component are less persistent than earnings with smaller accrual component, all else equal; and (2) the cash component of earnings should receive a higher weighting evaluating company performance.

Balance-Sheet-Based Accruals Ratio

Target Corp., balance sheet computation of aggregate accruals

USD $ in millions

	Feb 1, 2014	Feb 2, 2013	Jan 28, 2012	Jan 29, 2011	Jan 30, 2010	Jan 31, 2009
Operating Assets
Total assets	44,553	48,163	46,630	43,705	44,533	44,106
Less: Cash and cash equivalents	692	654	600	583	583	562
Less: Short-term investments	3	130	194	1,129	1,617	302
Operating assets	43,858	47,379	45,836	41,993	42,333	43,242
Operating Liabilities
Total liabilities	28,322	31,605	30,809	28,218	29,186	30,394
Less: Current portion of long-term debt and other borrowings	1,160	2,994	3,786	119	1,696	1,262
Less: Long-term debt and other borrowings, excluding current portion	12,622	14,654	13,697	15,607	15,118	17,490
Operating liabilities	14,540	13,957	13,326	12,492	12,372	11,642

Net operating assets¹	29,318	33,422	32,510	29,501	29,961	31,600
Balance-sheet-based aggregate accruals²	(4,104)	912	3,009	(460)	(1,639)	–
Ratio
Balance-sheet-based accruals ratio³	-13.08%	2.77%	9.70%	-1.55%	-5.32%	–%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
Amazon.com Inc.	76.27%	84.67%	173.74%	–%	–%	–%
Wal-Mart Stores Inc.	2.74%	4.43%	7.52%	6.77%	4.05%	–%
Balance-Sheet-Based Accruals Ratio, Sector
Broadline Retailers	–%	5.56%	8.98%	5.85%	200.00%	–%
Balance-Sheet-Based Accruals Ratio, Industry
Consumer Services	–%	3.68%	3.20%	9.99%	200.00%	–%

2014 Calculations

¹ Net operating assets = Operating assets – Operating liabilities
= 43,858 – 14,540 = 29,318

² Balance-sheet-based aggregate accruals = Net operating assets ₂₀₁₄ – Net operating assets ₂₀₁₃
= 29,318 – 33,422 = -4,104

³ Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -4,104 ÷ [(29,318 + 33,422) ÷ 2] = -13.08%

Ratio	Description	The company
Balance-sheet-based accruals ratio	Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets.	Using the balance-sheet-based accruals ratio, Target Corp. deteriorated earnings quality from 2013 to 2014.

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Cash-Flow-Statement-Based Accruals Ratio

Target Corp., cash flow statement computation of aggregate accruals

USD $ in millions

	Feb 1, 2014	Feb 2, 2013	Jan 28, 2012	Jan 29, 2011	Jan 30, 2010	Jan 31, 2009
Net earnings	1,971	2,999	2,929	2,920	2,488	2,214
Less: Cash provided by operations	6,520	5,325	5,434	5,271	5,881	4,430
Less: Cash required for investing activities	(271)	(2,855)	(4,180)	(1,744)	(1,703)	(4,373)
Cash-flow-statement-based aggregate accruals	(4,278)	529	1,675	(607)	(1,690)	2,157
Ratio
Cash-flow-statement-based accruals ratio¹	-13.64%	1.60%	5.40%	-2.04%	-5.49%	–%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
Amazon.com Inc.	-29.61%	-31.23%	-68.27%	–%	–%	–%
Wal-Mart Stores Inc.	3.88%	3.19%	6.79%	4.47%	-0.28%	–%
Cash-Flow-Statement-Based Accruals Ratio, Sector
Broadline Retailers	–%	2.24%	6.05%	2.14%	-1.43%	–%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Consumer Services	–%	3.10%	1.80%	2.42%	-0.48%	–%

2014 Calculations

¹ Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -4,278 ÷ [(29,318 + 33,422) ÷ 2] = -13.64%

Ratio	Description	The company
Cash-flow-statement-based accruals ratio	Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets.	Using the cash-flow-statement-based accruals ratio, Target Corp. deteriorated earnings quality from 2013 to 2014.

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