Target 2011 Annual Report Download - page 49

Critical Accounting Estimates
Our analysis of operations and financial condition is based on our consolidated financial statements, prepared
in accordance with U.S. generally accepted accounting principles (GAAP). Preparation of these consolidated
financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and
liabilities at the date of the consolidated financial statements, reported amounts of revenues and expenses during
the reporting period and related disclosures of contingent assets and liabilities. In the Notes to Consolidated
Financial Statements, we describe the significant accounting policies used in preparing the consolidated financial
statements. Our estimates are evaluated on an ongoing basis and are drawn from historical experience and other
assumptions that we believe to be reasonable under the circumstances. Actual results could differ under other
assumptions or conditions. However, we do not believe there is a reasonable likelihood that there will be a material
change in future estimates or assumptions. Our senior management has discussed the development and selection
of our critical accounting estimates with the Audit Committee of our Board of Directors. The following items in our
consolidated financial statements require significant estimation or judgment:
Inventory and cost of sales We use the retail inventory method to account for substantially all inventory and the
related cost of sales. Under this method, inventory is stated at cost using the last-in, first-out (LIFO) method as
determined by applying a cost-to-retail ratio to each merchandise grouping’s ending retail value. Cost includes the
purchase price as adjusted for vendor income. Since inventory value is adjusted regularly to reflect market
conditions, our inventory methodology reflects the lower of cost or market. We reduce inventory for estimated
losses related to shrink and markdowns. Our shrink estimate is based on historical losses verified by ongoing
physical inventory counts. Historically, our actual physical inventory count results have shown our estimates to be
reliable. Markdowns designated for clearance activity are recorded when the salability of the merchandise has
diminished. Inventory is at risk of obsolescence if economic conditions change. Relevant economic conditions
include changing consumer demand, customer preferences, changing consumer credit markets or increasing
competition. We believe these risks are largely mitigated because our inventory typically turns in less than three
months. Inventory was $7,918 million and $7,596 million at January 28, 2012 and January 29, 2011, respectively,
and is further described in Note 11 of the Notes to Consolidated Financial Statements.
Vendor income receivable Cost of sales and SG&A expenses are partially offset by various forms of consideration
received from our vendors. This ‘‘vendor income’’ is earned for a variety of vendor-sponsored programs, such as
volume rebates, markdown allowances, promotions and advertising allowances, as well as for our compliance
programs. We establish a receivable for the vendor income that is earned but not yet received. Based on the
agreements in place, this receivable is computed by estimating when we have completed our performance and
when the amount is earned. The majority of all year-end vendor income receivables are collected within the
following fiscal quarter, and we do not believe there is a reasonable likelihood that the assumptions used in our
estimate will change significantly. Historically, adjustments to our vendor income receivable have not been material.
Vendor income receivable was $589 million and $517 million at January 28, 2012 and January 29, 2011,
respectively, and is described further in Note 4 of the Notes to Consolidated Financial Statements.
Allowance for doubtful accounts When receivables are recorded, we recognize an allowance for doubtful
accounts in an amount equal to anticipated future write-offs. This allowance includes provisions for uncollectible
finance charges and other credit-related fees. We estimate future write-offs based on historical experience of
delinquencies, risk scores, aging trends and industry risk trends. Substantially all past-due accounts accrue finance
charges until they are written off. Accounts are automatically written off when they become 180 days past due.
Management believes the allowance for doubtful accounts is appropriate to cover anticipated losses in our credit
card accounts receivable under current conditions; however, unexpected, significant deterioration in any of the
factors mentioned above or in general economic conditions could materially change these expectations. Our
allowance for doubtful accounts related to our credit card receivables decreased $260 million, from $690 million, or
10.1 percent of gross credit card receivables, at January 29, 2011 to $430 million, or 6.8 percent of gross credit card
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PART II