Download Advanced Accounting Project Group #3

Advanced Accounting Project Group #3
Evan Joseph Reavey 。Dennis Lee 。AllaChebruch
Executive Summary
Our team prepared a thorough financial report of Costco Wholesale.
Costco sells a large variety of items conducive to all stages of our lives: from
food and clothes to diamonds and burial caskets. Costco’s method of business
rely on high inventory turnover and expansion. The company is Washington
based and operates worldwide with 673 warehouses. Costco opened its first
warehouse in Seattle Washington, on September 15, 1983. Researching the
companies' SEC forms, we gained a better understanding of Costco’s
operating and accounting methods. The company followed all laws and
regulations appointed by the SEC and the countries in which it operates.
Costco’s accounting methods were very conservative with detailed reports on
their consolidations and interests.
1.Summarize the company’s “Basis for Presentation and Principles of Consolidation.”
For the fiscal year ended August 31, 2014, Costco Wholesale Corporation's wholly
owned subsidiaries and controlling interest subsidiaries are reported under Costco’s condensed
consolidated financial statements. All material intercompany transactions have been eliminated
and the condensed consolidated financial statements have been prepared in accordance to the
rules and regulations of the Securities and Exchange Commission. All assets and liabilities
between Costco and its subsidiaries are reported at book value.
2.Summarize the method(s) used by the company to account for their investments. Include
discussion of how the company accounts for available for sale securities and trading securities
if any.
Costco Wholesaler holds certificates of deposits to be held to maturity. Highly liquid
cash equivalents are classified as trading securities, however, the company has made no material
realizable gain or loss to report on the statement of income from these investments. Costco also
holds several corporate and government bonds and securities. Such investments are classified as
available for sale investments and record all unrealized gain or loss under accumulated other
comprehensive income on the balance sheet. During 2015, the company has reported no material
gains or losses from the available for sale investments.
Available-for-sale:
U.S. government and agency securities
$1,398
Asset and mortgage-backed securities
$5
Total available-for-sale
$1,403
Held-to-maturity:
Certificates of deposit
$215
3.
Summarize the company’s goodwill accounting and impairment of goodwill if any.
Include any methodologies described by the company. (2014)
Costco’s accounting for goodwill comes from business combinations throughout the year.
These combinations may come from acquisitions or other transactions which may result in
Costco owning an additional business. The last time where goodwill was itsown separate account
on the financials for Costco is 2013. In 2015 and 2014, Costco focused more on building
internally rather than acquiring externally. This resulted in the absence any specific goodwill and
or impairment accounting in the financials for the last two years. Any goodwill would be located
in the “other assets” account, but there is no indication that goodwill is still accounted for in the
year 2015. When impairment and goodwill was recorded in the 2013 financial statements, review
of goodwill for any impairment normally occurred during the fourth quarter of the fiscal year.
However, the auditors mentioned that no impairment has occurred and goodwill was worth about
63 million dollars as of the balance sheet date in the 2013 10-K.
4. Summarize the company’s accounting for their foreign currency translation adjustments.
Identify and describe the impact any foreign currency adjustments. Can you identify the
method used to translate the foreign currency to US$$?
Costco records gains (losses) from foreign-currency transactions as interest income and
other in consolidated income statement. The transactions include U.S. dollar cash (or payables)
from foreign company’s subsidiaries and gains (losses) from foreign-exchange forward
contracts. Below is the net gain (in millions) for the past three years, which shows volatility due
to the foreign-currency exchange rate:
2013 $37
2014 $25
2015 $35
According to the income statement, foreign currency transaction gains were affected by
“favorable mark-to market adjustment” due to the favorable dollar to foreign currency exchange
rate. In addition, the gains from “revaluation of monetary assets and liabilities” contributed to
increase in net gains from foreign-exchange transactions (see the Table below).
Costco values its assets and liabilities held overseas in local currencies of the countries where it
operates. The assets and liabilities are translated from the local currency into US dollar at the
exchange rate on the balance sheet date.
5. Summarize the accounting treatment for the company’s VIE’s, if any.
According to the 2015 10-K financial statements, there is no evidence of Costco’s
involvement in owning any variable interest entities. This may be due it’s materiality in that the
volume of variable interest entities is not sufficient enough to be presented in the financials. As a
result, there is no accounting treatment for Costco’s variable interest entities because no variable
interest entities has been presented or disclosed in the financials.
6.
Summarize any acquisitions made during the year and the accounting treatment for the
acquisitions described in the financial statements. Include any summaries of contingent
consideration paid. Describe bargain purchases, if any.
Costco’s primary growth strategy is to expand its business by building or leasing new
warehouses. Costco has not acquired any new businesses since 2012.
7.Summarize the company’s hedging strategy(s) if any. There could be several strategies.
Costco Wholesale is exposed to different risks based on its business practices and
financial agreements with vendors, customers. The company has warehouses in the U.S.,
Canada United Kingdom, Australia, Mexico, Taiwan, South Korea, Japan and Spain. Costco’s
hedging strategies include managing foreign currency exchange-rate fluctuations by securing
international future contracts for no less than a year. Costco built 13 new stores abroad in 2015.
International operations accounted for 27% net sales and 36% of net income in 2015. Foreignexchange future contracts were used by Costco as a hedging strategy in order to minimize the
risk for the foreign currency fluctuation. The gains from these contracts amounted to $47 million
in 2015. Costco warehouses consume significant amount of gas and electricity. Therefore,
another hedging strategy is to minimize the risk of commodity price fluctuations by securing
fixed-price contracts.
8.Identify the company’s derivative’s strategy and what kind of predominant derivative
contracts the company uses. Describe your reasoning why the company uses a particular kind
of derivative contract.
Similar to hedging, Costco derivative strategies are affected by foreign-currency
exchange rate fluctuations. The company also uses foreign exchange contracts to protect itself
from volatility of the foreign exchange rate. These contracts are related to the inventory paid in
US dollars by foreign subsidiaries whose functional currency is not a US dollar. Foreign
exchange “unsettled forward” contracts valued at $889 million 2015. Costco uses “variablepriced” contracts for natural gas and fuel for its gas stations. Unrealized gains in 2015 amounted to $12
million.
9. Summarize the operating segments of the company and highlight any facts you find
interesting and why.
Costco’s operating segments are divided or identified based on geographic locations.
These locations include USA, Mexico, Canada, UK, Japan, and many other countries. On
Costco’s financial statements, they broke it up into United States, Canada, and other
International Operating Locations. According to the income statement, the incoming revenue for
2015 fro, the United States made up of 72.5% of the total revenue. The revenue from Canada
was about the same as their international operations with 14.9% and 12.5% respectively of the
total revenue. In addition to reporting the segments geographically, Costco also breaks up their
operating segments by item categories to see which item is generating the most sales. The
categories include all of the products they sell from foods to softlines. According to the
disclosures on the 10-K, food and sundries make up 22% and 21% respectively of the net sales.
Following are the hardlines, fresh foods, and ancillary and others with each segment ranging
anywhere from 14% to 16%. Last but not least, softlines make up for the smallest percentage of
net sales with 11% (as indicated in the pie chart below).
Some interesting grindings with the geographic segments is that while the segment in the
United States have gradually increase, the Canadian segment decreased from 2014 to 2015. In
addition to that, the international segment barely grew 2% over the last year. Another finding
was that the percentage of sales that comes from each item category didn’t change much over the
last three years. All categorizes have either stayed the same or change within the 1 percent range.
This shows that while Costco’s growth is limited, the company’s stock is rather steadily
increasing and can provide stable return for a low level of risk. Last but not least, in the notes, it
an interesting fact about stock-based compensation is that it is not allocated internally and is
generally considered a responsibility of United States’ management.
10. Summarize the non-controlling interests accounting in the consolidated financial
statements.
According to the financial statements, Costco has non-controlling interests in its
operations in Taiwan and Korea. Any inter-company transactions between Costco and its
subsidiaries have were eliminated in the audited consolidated financial statements. On the
consolidated income statement, it indicates that the net income attributed to Costco’s noncontrolling interests comes to a total of 32 million dollars for the year 2015. In respect to
Costco’s net income including the non-controlling interest, it only makes up 1.3% of the total net
income. Furthermore, the consolidated statement of equity shows that non-controlling interest
only stands for 2.1% of the total stockholders’ equity for Costco. As a result, this allows users to
understand that Costco has majority stake in most of their subsidiaries.
11. Find an interim financial statement and disclosures and summarize and similarities and
differences you find when comparing the interim financial statements to the annual
consolidated year-end financial statements. For instance, was there evidence of earnings
management each quarter or other manipulations during the year?
When comparing the 10-k and 10-Q, there are many similarities and differences between
the two set of financial statements. While the 10-Q is filed every quarter, it contains many of the
numbers that are used in the 10-K. One distinct difference was that the 10-Q shows the quarter’s
accounts as compared to the accounts of the same quarter from one year ago. On the 10-K, three
years’ worth of accounts are shown except for the balance sheet. Furthermore, the 10-K goes into
more details about the accounting principles used to determine the numbers that are on the
financial statements. In terms of financial statement manipulation, there seems to be no
manipulations as the stock price has not increase or decrease by large amounts. Normally,
financial statement manipulations can be used to overstate or understate earnings to either
prevent a takeover and or increase the value of the company in any acquisitions. Over time,
Costco’s stock price has gradually increased along with its revenues and expenses, but there is no
evidence that management is overstating or understating earnings (as depicted in the graphs
below).