Adjusting Financial Information Prior to Credit Analysis Target reports the following financial information in its form 10-K
Question:
Adjusting Financial Information Prior to Credit Analysis Target reports the following financial information in its form 10-K dated February 2, 2019. Note: Target had not yet adopted the new lease standard.
$ millions Feb. 2, 2019 Feb. 3, 2018
Total liabilities $28,493 $27,219
Equity 11,297 11,651
Operating lease liabilities
(not included on balance sheet) 2,062 1,968
EBIT* 4,137 4,283
Interest expense* 438 609
Operating lease interest included in selling,
general, & admin (rent expense) * 79 75 *
Adjusted for a 53rd week in year ended February 3, 2018
Required
a. Compute Liabilities to equity and Times interest earned for both years.
b. 1. Before calculating solvency ratios, credit rating agencies routinely adjust total liabilities by adding operating lease liabilities. Adjust Target’s total liabilities and recalculate the liabilities to equity ratio.
2. Does the adjustment make a material difference in the ratio?
c. 1. Before calculating coverage ratios, credit rating agencies routinely adjust interest expense by adding operating lease interest. Adjust Target’s interest expense and recalculate the times interest earned ratio.
2. Does the adjustment make a material difference in the ratio?
Financial Accounting Tools for Business Decision Making
ISBN: 978-1118644942
6th Canadian edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine