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