Income Statement and Net Income Essay

Risk Factors

Target’s success depends on many variables. Competitive edge, product, customer service and so on. In this paper we will consider 3 risk factors that could potentially affect Target’s ability to stay competitive. We will focus on the cash, sales, inventory, revenue and the balance sheet.

1. Maintain brand differentiation

Target’s success relies upon their ability to differentiate the experience of their customers from that of other retailers. If Target does not continue to create an attractive brand, they are likely to lose customers in the highly competitive retail market. By failing to maintain brand differentiation, Target’s cash flow and revenues would decrease. Without customers, they would sell fewer inventories, creating a problem for the asset account. A decreased flow of cash from sales of inventory would make it difficult for Target to manage short term liability accounts like accounts payable and expense accounts like utilities and rent. Cash and inventory are located in the asset section of the Balance sheet. Liabilities are also located on the balance sheet. Revenue and expenses are located on the income statement. Sales revenue would decrease, creating a lower gross margin.

2. High susceptibility to the state of macroeconomic conditions and consumer confidence

In times of economic hardship, customers are less likely to spend money and buy “things”. This could result in a reduction of overall sales, which would decrease cash accounts, revenues and the gross margin. Also, in time of economic downturn, customers may shop more with credit cards. In turn, they may have difficulty paying their credit card bills or just pay the minimum. This would impact Target’s account receivables in the asset account.
With lower cash flow, again, Target may have difficulty managing their liabilities accounts like short -term accounts payable and their expense accounts like rent and utilities. Cash, accounts receivable, accounts payable (liabilities) are located on the Balance sheet. Revenues and expenses are located on the on the Income Statement.

3. Interruptions in supply chain or increased commodity prices and supply chain costs

If Target has problems with having proper and adequate inventory in stock, they are subject to a loss in sales. This would result in a decrease in cash flow and revenues. In addition, if costs related to supply chain increase, Target would likely incur greater expenses, without a guarantee of an increase in revenues. An increase in expenses would lower operating income and net income as well. As commodity prices increase, this would increase COGS and also lower the gross margin. Cash and inventory are located on the balance sheet. Revenues, COGS, expenses (operating income) are located on the Income statement. FORM 10-K PROJECT
MBA 8025 (Financial Statement Analysis)
Spring Semester 2013

PART 2: 20 Points; Due no later than the beginning of Class 3
Use the most recent period unless the question specifies otherwise.

Risk Factors
Examine Item 1A (Risk Factors) on the firm’s Form 10-K. For each of three (your choice) risk factors, present how the factor could adversely affect your firm’s income (revenues/gains and /or expenses/losses), assets, liabilities, and cash flows. Specify which account(s) in the Statement of Income and Balanced Sheet. Also specify, how (increase or decrease) the account(s) and section(s) are affected. Your analysis should be exactly one page total (be concise).

Income Statement

1. What is the firm’s operating income? Income after COGS and other operating expenses are subtracted from revenues-$5,322,000,000. Operating

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