Costco Wholesale Corporation is a wholesale retailer headquartered in Washington. The document analyzes Costco's 2012 fiscal year financial statements and performance. It finds that Costco has a strong balance sheet with over $13 billion in total assets, including $7 billion in inventory and $3.5 billion in cash. Costco has stable profitability with a gross profit margin around 13% and net income of $1.7 billion in 2012. The document concludes that Costco has effective internal controls and generates sufficient cash flow to fund operations and expansion.

1. Costco Wholesale Corporation Financial Analysis
Phil Gamble
December 10, 2013

2. 1
INTRODUCTION
This paper walks through the 10K Form for Costco Wholesale Corporation’s 2012
fiscal year ended on September 2nd. It is the collection of an entire semester’s worth of
accounting basics and financial analysis. All of the dollar amounts in this report are in
millions, except if stated otherwise. The report starts with an overview of the company and
its balance sheet, moving into the analysis of ratios that use time sequence and industry
comparison. Finally the report draws from all aspects of the financial statement, and
reports on the future prospects for Costco.
BACKGROUND INFORMATION
Costco Wholesale Corporation is incorporated in the state of Washington. Issaquah,
Washington is the location of Costco’s headquarters (1). Costco’s most recent fiscal year
ended on September 2, 2012 (1). The name of Costco’s independent outside auditor is
KPMG (35). Costco’s stock is sold on The NASDAQ Global Select Market (Morningstar). The
current stock price as of December 9th is $121.66 per share (Morningstar).
FINANCIAL OVERVIEW
Balance Sheet
Costco’s total assets at the beginning of its fiscal year were $13,706 million (42). At
the end of its current fiscal year, Costco’s total assets were $13,526 million (42). Costco’s
total liabilities at the beginning of its fiscal year were $ 12,050 million (42). The company’s
largest assets are merchandise inventories of $7,096 million and cash and cash equivalents
of $3,528 million (42). At the end of its current fiscal year, Costco’s total liabilities were $
12,260 million (42). Its largest liability is by far accounts payable of $ 7,303 million (42).
Accrued salaries and benefits is the second largest liability of $1,832 million, and third is
deferred membership fees of $ 1,101 million (42).
Income Statement
Costco’s total revenue for the current fiscal year is $99,137 million (43). For the
fiscal year ending on August 28, 2011, Costco’s total revenue was $88,915 million (43). The
total revenue was $ 77,946 million for the fiscal year ended on August 29, 2010 (43).
Costco’s net income for its current fiscal year is $ 1,709 million. In 2011 and 2010 Costco
earned $1,462 and $1,303 million respectively (43). The only two sources of revenue are
net sales of $97,062 million and membership fees of $2,075 million for the 2012 fiscal year

3. 2
(43). Costco’s largest expenses are merchandise costs of $86,823 million and selling,
general and administrative expenses of $9,518 million for the 2012 fiscal year (43).
Cash Flow Statement
Costco’s net cash flow from operating activities was $3,057 million for the 2012
fiscal year (44). For the fiscal year ending in August of 2011 the net cash flow from
operating activities was $ 3,198 million and for the fiscal year of 2010 it was $ 2,780
million (44). Costco definitely generates sufficient cash from operations to fund its
investing activities because the cash from operations is almost $1,800 million more than
the money used in investing activities (44).
STRATEGIC OVERVIEW
Basic Information
Costco operates in the wholesale industry in the United States and seven other
countries worldwide. Its main competitors are Wal-Mart Stores Incorporated, BJ’s
Wholesale Club Incorporated, and Target Corporation (8). Costco sells a limited selection
of nationally branded products and also operates under a private brand, Kirkland Signature
(12).
Business Model and Strategies
Costco’s business model is that of a low cost company that sells all of its products at
wholesale prices. Per unit Costco has prices that are hard to beat. However, all of the
products in the warehouses are only sold in large quantities. Also Costco carries a limited
number of top brands that ensures a good relationship with its suppliers. Costco can keep
prices so low due a strong bargaining position with supplier and the construction of its
stores. Its stores are warehouses with concrete floors, few employees, and all of its
products are packaged in boxes that allows for easy maneuvering with a forklift.
Customers also have to be Costco members and pay a $55 yearly fee to enter the store (6).
Costco’s membership renewal rate in the United States and Canada in the fiscal year 2012
was 87.9%, which indicates strong customer loyalty (MarketLine 4). In addition to strong
customer loyalty, membership fees also bring in additional revenue other than net sales.
The main strength of Costco is its very efficient low cost operating model
(MarketLine 4). Its warehouses offer a limited selection of national and private brands
across a wide merchandise range (Marketline 4). Inventory turnover is high due to the low

4. 3
prices Costco provides, which keeps inventory costs low (Marketline 4). This is crucial
because it allows Costco to receive payment from customers for goods before payment to
merchandise venders is due (Marketline 4). Costco can achieve favorable terms with
suppliers by paying cash during the discount period, and reduce interest expense using this
strategy.
One of the weaknesses that Costco has is a lack of online options to purchase its
goods. Costco has options to buy goods online, but consumers very rarely utilize this
purchasing path (MarketLine 6). This is a great concern because the US Census Bureau
reported that online retail sales increased 16% from $142 billion in 2009 to $224 billion in
2012 (MarketLine 7). Wal-Mart and Amazon are already dominating online shopping, and
Costco will lose customers if a user friendly online buying option is not provided. This
weakness can be turned into an opportunity with an update to the company’s website, and
creation of Android and Apple smartphone applications (MarketLine 7).
Another weakness Costco has is a limited selection of products; Costco only offers 3,300 to
3,800 products to sell at a particular time (MarketLine 6). Customers’ who prefer a one-
stop buying experience may forgo lower prices in exchange for a more seamless buying
experience (MarketLine 6).
Environment and Social Performance.
In order to protect the environment, Costco does not use plastic bags, but customers
use recycled boxes to carry goods to their cars. Also signs are posted in the warehouses
that urge customers to keep the doors of the refrigerators closed in an effort to not only cut
costs, but to reduce the carbon footprint of the warehouses. Even in a struggling economy,
Costco pays its workers an average of $21 an hour and gives eighty eight percent of its
workers health insurance (Stone 3). Costco’s new CEO Craig Jelinek believes that healthy,
happier workers contribute to increased profitability. He also wrote a letter to Congress
asking for an increase in the minimum wage (Stone 3). Jelinek stated that it has been
proven that providing employees with a living wage and health care puts more money back
into the company and minimizes employee turnover (Stone 3).
ASSESSING LIQUIDITY
Current Ratio

5. 4
The current ratio for Costco at the end of its fiscal year in 2012 was 1.16. At the end
of its fiscal year in 2012 it was 1.14 (41). In its 10K, Costco notes that the primary sources
of liquidity are “cash flows generated from warehouse operations and cash and cash
equivalents and short-term investment balances” (27). These ratios do not adjust for a
LIFO reserve. For 2011 and 2012 the LIFO reserve was $108 million and $87 million due to
inflation (49).
Industry Analysis
In order to evaluate the current ratios for 2011 and 2012, it is necessary to look at
past current ratios. Costco’s current ratio has remained very stable from 2003 to 2011,
varying from 1.05 to 1.16 (Morningstar). The lowest ratios occurred during the recession
from 2006-2009, but the company since then have been relatively more able to pay back
short-term obligations (Morningstar). Wal-Mart, another competitor in the general
merchandise retailer industry, had a current ratio of .87 in 2011 and .89 in 2012
(Morningstar). Also Target had a current ratio of 1.63 in 2011 and a current ratio of 1.71 in
2012 (Morningstar). Relative to the industry I think that Costco shouldn’t be concerned
with its liquidity, because it is very close to its competitors that also have found success in
the wholesale industry.
Effect of Current Ratio on Stock Price
Investors seem to have no problem with the liquidity of Costco, when looking at the
company’s stock in the past 10 years. While its current ratio has stayed relatively constant,
Costco’s stock went from $28.06 a share on September 30, 2003 to $115.17 a share ten
years later on September 30, 2013 (Prior 1). Wall Street appears to be very confident in
Costco’s ability to pay back short-term and other obligations.
ASSESSING PROFITABILITY
Revenue Recognition
Costco only has two sources of revenue: net sales and membership fees (45). Net
sales were almost entirely from merchandise sold and totaled $87,048 million in the 2012
fiscal year (45). Membership fees totaled $1,867 million in the same fiscal year. Revenue is
recognized “at the time the member takes possession of merchandise or receives services”
(34). When Costco receives revenue before the transfer of ownership of the merchandise
or before a service is performed it is recorded as a liability under deferred revenue (34).

6. 5
This seems appropriate because GAAP mandates that a company record revenue only after
it has been earned. Costco utilizes the matching principle by matching expense with
revenue.
Costco record no gains, losses, or non-operating items in the company’s income
statements from the past 3 years.
Gross Profit Rate and Profit Margin
At the fiscal year ended on August 28, 2011, Costco has a gross profit rate of .128
(45). A fiscal year prior in 2010 the gross profit was .130, and two years prior Costco
recorded a gross profit of .130 (45).
INVENTORY ACCOUNTING
Cost-Flow Assumptions
Costco uses the LIFO cost assumption when valuing merchandise inventories in the
United States (34). The company states in its 10K report that the LIFO method is used
because it “more fairly presents the results of operations by more closely matching current
costs with current revenues” (34). In order for Costco’s financial statements to be
compared with other companies that use the FIFO cost-flow assumption, Costco provides a
LIFO reserve in the footnotes (25). The LIFO reserve increase of $21 million in 2012
mostly resulted from higher costs for food, sundries, and gasoline (25).
LIFO is also used as a tax cutting mechanism. During periods of increasing prices,
Costco will report a lower pre-tax income using LIFO then if it had used FIFO. Increasing
prices suggests that the “last goods in” are more expensive than the “first goods in” and will
result in a higher cost of goods sold. A higher cost of goods sold will result in a lower pre-
tax income, and therefore a lower income tax. This saves Costco money, and allows it to
further offer lower prices to customers. It is also important to note that warehouses not
located in the United States use FIFO in order to conform to regulations set by the
International Accounting Standards Board (34).
Inventory Turnover
The inventory turnover for Costco in 2011 was 12.66 times in the 2011 fiscal year,
and 11.95 times in the 2010 fiscal year. Days in inventory totaled 28.82 in 2011 and 30.65
in 2010. Costco was looking to increase inventory turnover and decrease days in inventory
over the past two years in order to compete with Wal-Mart and its leading inventory

7. 6
system. Retailers want to keep minimum amounts of inventory on hand, but at the same
time keep its stores filled with goods that customers are looking for (Kimmel, Weygandt &
Kieso 2013).
INTERNAL CONTROL OVER FINANCIAL REPORTING
Identifying Internal Controls
Costco’s annual report on internal control over financial reporting specifies three
main areas regarding the reliability of its financial reporting (36). The first policy that
Costco enforces is that records are maintained in accurate details that rightly show
transactions and the composition of its assets (36). Costco also employs procedures that
record transactions in accordance with GAAP, and procedures that ensure cash receipts
and expenditures only occur following appropriate authorizations (36). The last internal
control policy that Costco has is providing reasonable assurance that the company prevents
and detects unauthorized use of assets that could have an adverse effect on financial
statements.
All of these policies and procedures are meant to assure outside decision makers
that Costco’s financial statements are as accurate as possible (36). Management
acknowledges the limitations of its system of internal controls, but has concluded that
internal control over financial reporting was effective as of September 2, 2012 (36). No
internal control weaknesses were identified (36).
Independent Auditor’s Opinion
KPMG, Costco’s independent auditor, plays a critical role in examining and testing
the evidence that Costco uses to determine the amounts in its financial statements (40).
The independent auditor also examines the information used to prepare disclosures
included in its financial reporting (40). In the opinion of KPMG, Costco “maintained, in all
material respects, effective internal control over financial reporting as of September 2,
2012” (40).
CASH
Costco records as cash and cash equivalents all highly liquid investments with
maturity of three months or less at the date of purchase (49). Also, cash and cash
equivalents can only include amounts due from credit and debit cards transactions, if those
amount “have settlement terms of less than one week” (49). From August 28, 2011 to

8. 7
September 2, 2012, Costco’s cash and cash equivalents increased 24.73%, from $3,214
million to $4,009 million (44). Costco’s cash and cash equivalents has increased at this rate
due to an increase in sales in the United States and a higher percentage of revenues coming
from international stores than ever before (How Does Costco Make Money?). From 2010 to
2011, Costco reported a 7% increase in the comparable store sales in the U.S. (How does
Costco Make Money?). Another primary source of cash and cash equivalents is due to
“revenue contribution of Coscto’s international business increasing from 18% in 2008 to
22% in 2011” (How does Costco Make Money?). Both of these factors increase cash and
cash equivalents because Costco’s revenue, in the fiscal year 2011, was 97.89% dependent
on net sales (45). Any increase in cash and cash equivalents is therefore going to be
primarily dependent on net sales.
EVALUATING ACCOUNTS RECEIVABLE
In the company’s annual report, Costco is very brief in its policies for bad debts and
allowance for doubtful accounts. This is because Costco does not have a store credit card.
Therefore, the risk of a customer not paying his or her credit card bill lies with the credit
card companies, not Costco. Costco still has a small allowance for doubtful accounts
balance of $2 million for 2012 and $3 million for 2011 (48). Write offs for the past 3 fiscal
years were immaterial (48). Accounts receivable are mostly in the form of volume rebates
or other purchase discounts from vendors, making accounts receivable and average
collection period not applicable (49).
PROPERTY, PLANT, AND EQUIPMENT
Balance Sheet Data
Under property and equipment, Costco has listed on its balance sheet: land,
buildings and improvements, equipment and fixtures, and construction in progress (44).
September 2, 2012 August 28, 2011
Land $4,032 $3,819
Buildings and Improvements 10,879 10,278
Equipment and fixtures 4,261 4,002
Construction in process 374 269
Accumulated Depreciation
and Amortization
(6,585) (5,936)

9. 8
Also, as a contra-asset, accumulated depreciation and amortization are included on the
balance sheet (44). The book values of these assets for the past two fiscal years are shown
in the table below (44).
Capital expenditures in the 2012 fiscal year totaled $1,290 million, in 2011 they
totaled $1,055 million, and in 2010 they totaled $1,250 million (80). The increase from
2010 to 2011 was due to Costco consolidating its 32 Mexico warehouse in 2011 (18).
Costco’s main capital expenditures are payments for increasing its warehouse spaces, and
the payments equipment, such as forklifts, used to stock their products (18). Costco’s
assets classified as held for sale were immaterial at the end of the last two fiscal years (50).
Losses included in the selling of assets were also immaterial (50). These trends indicate
that Costco’s long-term capacity is growing as the company spends more than a billion
dollars a year improving its assets. Also Costco is expanding by purchasing more
warehouses in order to increase its market share of the retail industry.
The company’s accounting policies regarding depreciation of property and
equipment are as follows: “depreciation and amortization expense is computed using the
straight-line method over estimated useful lives or the lease term, if shorter” (52). The
estimated useful life for buildings and improvements is 5-50 years, and for equipment and
fixtures, 3-20 years (52). Costco also evaluates long-lived assets for impairments
periodically when relocating or closing a warehouse (52). On the company’s consolidated
balance sheet, impairment costs are listed under “provision for impaired assets and closing
costs, net” (45). Deprecation expenses are not specifically listed, but would fall under
“selling, general and administrative” expenses (45).
INTANGIBLE ASSETS
Goodwill
Costco only has goodwill listed on its balance sheet under “other assets” (53). The
book values for goodwill in the fiscal years of 2011 and 2010 were $74 million and $71
million respectively (53). Costco uses a straight-line method of amortization of its
intangible assets over their useful lives, but it does not specifically name any assets as
intangible, only capital leases (52).
Other Intangible Assets

10. 9
Although goodwill is the only intangible asset listed separately on Costco’s balance
sheet, I think there are a few other intangibles that Costco left has out. Most of the
copyrights or patents that Costco could have recorded in its 10K report would be a part of
its private label brand, Kirkland Signature. For example, Kirkland Signature has a laundry
detergent called Ultra Clean that uses a “patented catch and release technology” (Costco
Connection). Costco is constantly trying to patent new products under its private label that
have average quality, but are far cheaper than the leading brands. A few examples of
Costco’s registered trade marks are: COSTCO BUSINESS CENTER, THE COSTCO
CONNECTION, COSTCO HOME, COSTCO ONLINE, COSTCO WHOLESALE CASH, GOLD STAR,
KIRKLAND SIGNATURE, PRICE CLUB, NO LINES ONLINE, EXECUTIVE MEMBER,
BALLANTRAE WINE MERCHANTS, CANINE CLUB, CHOCOLATES OF THE WORLD, COURT
CLASSIC, FUNHOUSE TREATS, and SEATTLE MOUNTAIN (Costco Terms and Conditions of
Use). United States GAAP doesn’t allow Costco to record these patents on its balance sheet
because their values are subjective and hard to determine.
RETURN ON ASSETS ANALYSIS
Using financial data found in Costco’s 10K report, the table below shows the profit
margin, asset turnover and return on assets for each of the past five years (20).
The return on assets decreased between the fiscal years 2009-2010 is due the increase in
assets caused by 24 new warehouses that were opened in 2009 (18). Average total assets
increased at a faster rate then net income due to the new costs incurred from opening the
large number of stores, therefore lowering the return on assets (20). Costco leaned in this
mistake, and only opened 15 and 13 new stores in 2010 and 2011, respectively (20).
(dollars in millions)
Sept. 2,
2012
Aug. 28,
2011
Aug. 29,
2010
Aug. 30,
2009
Aug. 31,
2008
Net Income $1,462 $1,303 $1,086 $1,283 $1,083
Net sales $87,048 $76,255 $69,889 $70,977 $63,088
Average total Assets $25,288 $22,897 $21,331 $20,145 $19,607
Profit Margin 1.68% 1.71% 1.55% 1.81% 1.72%
Asset turnover 3.44 3.33 3.28 3.52 3.22
Return on Assets 5.78% 5.69% 5.09% 6.37% 5.52%

11. 10
LIABILITIES
Ratio Analysis
The two largest current liabilities in Costco’s 10K for the fiscal year ended on
September 2, 2012, accounts payable of $7,303 million and accrued salaries and benefits of
$1,832 (42). Costco’s debt to asset ratio and times interest earned ratio for the 2012 and
2011 fiscal years can be seen in the table below (42).
The debt to asset ratio suggests that over the past two years, Costco has kept the
percentage of its assets financed by creditors constant, only varying by .85% (42). Costco
is relying slightly more on debt to finance its activities in 2012 than in 2011 than resources
invested by owners (Kimmel, Weygandt & Kieso). The times interest earned ratio
increased in 2012 from 2011, signaling Costco having less difficulty meeting its interest
payments (42). This indicated that in 2011 Costco’s income before interest and taxes was
29.516 times the amount needed for interest expense (Kimmel, Weygandt & Kieso).
Long-Term Debt
Costco has specified only one type of long-term debt it uses to raise capital (61). In
2007 Costco issued $1,100 million of Senior Notes due March 15, 2017, at a contractual
interest rate of 5.5% (61). These notes were sold at a discount of $6 million, have a
carrying value of $1,097 and a fair value of $1,325 million as of September 2, 2012 (61).
Costco may redeem these notes before maturity by paying 101% of the principal amount
plus accrued and unpaid interest to the date of repurchase (61).
STOCKHOLDERS’ EQUITY
Common and Preferred Stocks
Fiscal year ending on
September 2, 2012
Fiscal year ending on
August 28, 2011
Debt to Asset Ratio 53.9% 53.1%
Times Interest Earned Ratio 29.516 20.853
Shares
Authorized
Shares Issued Shares
Outstanding
Par Value per
share
Preferred Stock 100,000,000 0 0 $.005

12. 11
In the stockholders’ equity section of Costco’s balance sheet, only two types of exist:
common stock and preferred. The table below provides the basic data concerning these
two stocks (42)
The number of stocks outstanding in 2012 decreased due to Costco repurchasing
more stock then the number of stock options that were exercised and the release of vested
Restricted Stock Units (44). This resulted in a decrease of 1,903 million shares outstanding
from 2011 to 2012. Additional paid-in capital decreased mainly due to purchasing a non-
controlling interest in Costco Mexico on July 10,2012 (22). Prior to the purchase, Costco
owned 50% of Costco Mexico through a joint venture (22). This purchase Costco to record
the net income from stores in Mexico under “net income attributable to Costco” in its
income statement, as opposed to “net income attributable to non-controlling interest” (22).
Retained earnings increased $723 million in 2012 due to a strong net income, partially due
to the acquisition of the Costco Mexico (22).
Treasury Stock
Costco does not have any treasury stock in its financial statements. This is due to its
policy on repurchased stocks: “Repurchased shares are retired, in accordance with the
Washington Business Corporation Act” (31). In 2012 the company bought back “7,272
shares of common stock, at an average cost of $84.75 per share, totaling approximately
$617 million” (22). Costco did not issue any new stock in 2012. Stock options exercised,
including tax effects in 2012, totaled 2,756 million shares, adding $142 million to additional
paid-on capital (44). Also, the release of vested restricted stock totaled 2,554 million shares
in 2012, decreasing additional paid in capital by $76 million (44). The company states: “the
fair value of restricted stock units (RSUs) is calculated as the market value of the common
stock on the measurement date less the present value of the expected dividends forgone
during the vesting period” (54).
Dividends
Costco’s quarterly cash dividends were paid out in 2012 at $0.24 during the first and
second quarter and $0.55 in the fourth quarter (19). The company increased the quarterly
cash dividends from $0.24 to $0.275 in May of 2012 (29). This increased the cash
Common Stock 900,000,000 432,350,000 434,266,000 $.005

13. 12
dividends for the year to $1.03 per share from $0.89 in fiscal year 2011 (29). Cash
dividends declared totaled $446 million in 2012 for the 432,350 shares outstanding held by
8,154 stockholders of record (19).
The company’s payout ratio for 2012 was .261:1 and for 2011 was .266:1 (44).
Costco kept its payout ratio constant for the past two years to signal to investors that it is a
growing stable company. Not only is the stock a good buy in terms of future capital gains,
but Costco also rewards its shareholders with quarterly dividends in proportion with its
earnings for the quarter. Wall Street is not always happy with CEO Jim Sinegal’s decisions,
especial Costco’s average pay of $17 an hour (Greenhouse 1). An analyst at Deutsche Bank
complained in 2012, “it’s better to be an employee or a customer than a shareholder”
(Greenhouse 1). Costco’s stock price has risen more than 10 percent from August 2011 to
September 2012, because so many people love the treatment of employees, in addition to
the savings (Greenhouse 2).
Financial Strategy
After analyzing the liabilities and stockholders’ equity of Costco, I concluded that the
company is gradually adopting a financial strategy that leans more heavily on debt
financing than equity financing. This can be seen first and foremost in the company’s
yearly stock repurchasing program where, in the past three years, an average of 8.5 million
shares have been repurchased and retired each year (44). Also Costco’s debt to asset ratio
has increased in the last three years, as the company increases its notes payable (42). Total
stockholders’ equity has been steadily decreasing since 2005 as a percentage of total
liabilities and equity, making the company more reliant on debt (Morningstar).
CASH FLOWS
Summary
The cash flows for Costco in 2012 are listed in the table below (45).
Category 2012 2011 2010
Operating $3,057 $3,198 $2,780
Investing (1,236) (1,180) (2,015)
Financing (2,281) (1,277) (719)
Net Change in Cash $(481) $795 $57

14. 13
Not included in this table was the effect of exchange rate changes on cash and cash
equivalents (45). By only looking at the table above one could make only a few conclusions
about Costco’s cash flows. Costco created a large amount of cash from operating activities
in the past three fiscal years, but cash from financing activities has decreased at a high rate.
This resulted in a negative cash flow for 2012, a decrease of more than a billion dollars
from 2011 (45). Costco is a mature company that is paying back its long-term debts and
buying back stock (45). For these reasons the large negative cash flow from financing
activities, seems to be an acceptable number. 5.3% senior notes that were due March 2012,
and the purchase of non-controlling interest in Costco Mexico caused the dramatic
decrease in cash flows from financing activities (45).
Analysis
Costco’s primary sources of cash during its most recent fiscal year were net sales
and membership fees (20). If Costco had used the direct method to report cash from
operating activities, the values would be evident from these cash flows. However, because
the indirect method is used, it is necessary to derive from Costco’s business strategy how it
earns cash (45). The company spent the most cash on purchases of short-term investments
and additions to property and equipment for the last three fiscal years (45). Costco has
consistently spent cash in this way because of their business model as a general
merchandise retailer.
Net cash flows from operating activities have remained relatively constant in the
past 2 years, totaling in $3,057 in 2012 and $3,198 in 2011 (45). In 2010, net cash flows
from operating activities were much lower then the past two years at $2,780 million (45).
The primary reason that the net cash flows from operating activities differed from net
income the past 3 years are the adjustments to depreciation and amortization expense, and
increase in accounts payable (54). Depreciation and amortization increased steadily each
year as Costco opened 81 new warehouses in the United States and abroad (18). Accounts
payable fluctuated in the past 3 years, and had a inverse relationship with the third largest
cash flow from operating activities: increase in merchandise inventories (45).

15. 14
Illustrated in the table below are the percentage changes in Costco’s net sales
revenue, net income, and net cash flows from operating activities in each of the last three
fiscal years (20).
% change 2012-2011 2011-2010
Net Sales Revenue 11.50% 14.15%
Net Income 16.89% 12.20%
Net cash flows from
operating activates
-4.41% 15.04%
The main trend in these percent changes is that net sales revenue and net income
have been positively increasing during the past 3 fiscal years (20). I think that this is due to
the simple Costco business model of selling consumer goods to individuals and businesses.
The next highest revenue is membership fees, which is 2% the amount of net sales (20).
Costco is also a low cost provider, that needs to sell a large quantity of goods to make a
large gross profit, due to the low profit margin gained on each good sold. Net cash flows
from operating activities are trending in the opposite direction (45). The 2012 Form 10K
Report point to the main cause of the -4.41 decrease due to an “increase in our net
investment in merchandise inventories (change in merchandise inventories less changes in
accounts payable) of $314” (28). More cash was used to buy inventory then in the year
prior, possibly to cut down on interest expense by take advantage of the company’s $3.5
billion in cash (45).
Interest and income taxes for the last three fiscal years can be seen in the table
below (27). The interest expense is mostly related to the $900 million of 5.3% and $1,100
million of 5.5% Senior Notes issued in 2007 (27). Costco uses a provision for income taxes
methods due to the complexity of tax law, and states that significant judgments and
estimates are used (33).
2012 2011 2010
Interest $95 $116 $111
Income tax $1,000 $841 $731

16. 15
Cash Debt Coverage
Costco’s free cash flow, current cash debt coverage, and cash debt coverage can be
seen in the table below (42).
The figures presented in the table for each year have positive relationships. When
free cash flow is high, Costco is going to be more able to pay back debt with its cash flow
from operations. It is important to note that the authors of Financial Accounting for
Decision makers believe that if current cash debt coverage is under .40 or cash debt
coverage is under .20 then a company’s liquidity need to be further investigated (Kimmel,
Weygandt & Kieso). These two coverages apply to the company’s apply to a company’s
ability to repay liabilities form cash generated from operation, without liquefying
productive assets such as plants, property or equipment (Kimmel, Weygandt & Kieso). I
think that there is little cause for concern, however, because almost a fourth of Costco’s
assets are merchandise that are highly liquid and could be sold at a reduced price to gain
cash to pay back short-term debt (42).
Under noncash investing and financing transactions four items are listed: decrease
in accrued property and equipment, property acquired under capital leases, unsettled
repurchases of common stock, and distribution declared but not paid to non-controlling
interest (45). Distribution declared but not paid to non-controlling was $22 million and
refers to the agreement that Costco made with its joint venture partner, Controladora
Comercial Mexicana, when Costco acquired its 50% equity interest in Costco Mexico (22).
Cash Flow Summary
2012 2011 2010
Free Cash Flow $1,131 $1,519 $1,387
Current Cash Debt
Coverage
.2515 .2901 .2850
Cash Debt Coverage .2069 .2292 .2231

17. 16
I am not concerned about Costco not generating sufficient cash flow form its
operations to cover the replacement and growth of its long-term assets. Costco has been
very successful in generating operating cash flows, and has been investing this cash
immediately back into merchandise to take advantage of discount periods. Cash flow from
operations only decreased slightly in 2012, and the negative change in cash was mostly due
to bonds that had reached their maturing date, and the purchase of Costco Mexico. These
two transactions are not an annual expense, and are allowing the company to expand into
international markets. Costco still has $3,528 million of cash and cash equivalents at the
end of 2012, and did not issue new bonds or stock to raise additional case (45). Financing
from Costco come exclusively from senior notes that were issued in February 2007 (30).
SUSTAINABLE INCOME
Extraordinary Items
In 2012 Costco’s warehouse in Tamasakai, Japan was reopened (29). This
warehouse was severely damaged in the March 2011 Japan earthquake that demolished
parts of the island country (29). This is very important for Costco’s image internationally
because the company could have closed the warehouse for good, but instead made a
commitment to the people of Japan to rebuild.
Comprehensive Income
For the fiscal year 2012, Costco’s comprehensive income was $96 million less than
its net income (44). This was caused by foreign-currency translation adjustment and other
adjustments that are not specified (44). Comprehensive income includes all changes in
stockholders’ equity, during a year, except those changes resulting from investments by
stockholder sand distributions to stockholders (Kimmel, Weygandt & Kieso). Sustainable
income is the most likely level of income a company may obtain in the future (Kimmel,
Weygandt & Kieso). It is computed by adjusting for irregular items (Kimmel, Weygandt &
Kieso). Costco has no irregular items in the 10K report. Therefore, sustainable income is
equal to net income for 2012 of 1,709 million (44).
RATIO ANALYSIS
Price-earnings Ratio
The price-earnings ratio for all three companies was found using Morningstar. This
ratio is computed by dividing market value per share by earnings per share (Kimmel,

18. 17
Weygandt & Kieso). The number of shares cancels and the ratio is left as how much market
value a company has divided by net income. Costco is well above competitors with a very
strong P/E ratio (Morningstar). This is due to strong net income in the past 2 years relative
to market share (44).
2012 2011
Costco 24.0 25.1
Wal-Mart 18.4 18.9
Target 17.2 18.1
UPDATE
In the past 2 years, Costco’s stock price has risen from $75.68 to $122.65
(MorningStar). This is due to high consumer confidence in the company, and a 90%
membership renewal rate (Greenhouse 2).
SUMMARY AND CONCLUSION
Revenue
Costco’s revenue has risen about $10 million the past three fiscal years, totaling
$97,062, in 2012 (43). I fully expect revenue to continue to grow larger in the future, due
to Costco buying Costco Mexico, and expecting to open 32 warehouses in 2013 (64).
Revenue is based almost entirely on net sales, and as long as Costco keeps offering goods to
consumers at a high value, customers will renew memberships, and continue buying goods.
Profit
Costco’s business strategy is that of a lost-cost retailer. Profit from individual
products may be as low as 10-15%, as opposed to the 30-45% department stores offer
(Greenhouse 3). Gross profit has increased 9.4%, 12.7%, and 10.0% in 2010, 2011, and
2012, respectively. Wall Street is very confident in Costco’s ability to make profit, as seen
in their $120 stock price (Morningstar). I think that profits can increase even more as

19. 18
Costco offers more and more Kirkland privet branded products in their stores. The profit
margin from these products is higher because Costco does not have to share the profits
with large name brands that have high bargaining power.
Asset Investment Strategies
The main assets Costco invests in are merchandise and buildings (44). Their
business strategy moving forward is to expand internationally, and gain higher market
share. This is going to be done by finding good locations to place new stores, and properly
training employees.
Financing Strategies
Costco had a very large negative cash flow from financing activities in 2012 due to
paying back the principle on $900 million notes, and purchasing Costco Mexico (18). Also
the company buys back about 8 million bonds each year. I think that moving forward,
Costco will need to issue new notes to continue its financing strategy. Costco can obtain
low interest rates on these bonds due to its strong financial history.
Strong Aspects of Performance
I think the Costco did a great job in 2012 increasing gross profit, while not
decreasing revenue. This means that customers are willing to pay slightly extra for
Costco’s high value goods. Also they company did very well in making employees happy.
Costco pays its employees an average of $16 per hour which is far above minimum wage,
and as one employee puts “I want to retire here”(Greenhouse 3). Lastly the Companies
stock price has done very well this year which indicated confidence from stockholders and
Wall Street that Costco is on the path to success.
Weak Aspects of Performance
Costco did not expand into international markets as much as they should have in
2012. Only one third of new warehouses were opened in Canada and other international
countries in 2012 (18). Net income slightly decreased form 2011 to 2012, which could
signal an increase in costs that Costco has mishandled. Expenses rose at a faster rate then
revenues for Costco, and the company may have to reevaluate its supply chain to identify
the large expenses.
Future Prospects

20. 19
Through a semester of analyzing Costco, I firmly believe that if the company corrects
its weaknesses, it will remain a leader in the general merchandise retail industry for years
to come. The three financial statements and footnotes had no items that gave me concerns.
I believe with a rejuvenated economy in 2014 Costco will show large increases in revenue,
net income, and especially net cash flows.

21. 20
REFERENCE LIST
Printed Sources
Kimmel, Weygandt & Kieso. Financial Accounting. Hoboken: Wiley, 2013. Print
Internet Sources
Morningstar. 2013. Costco Wholesale Corporation. Available at:
http://quotes.morningstar.com/stock/s?t=COST&region=USA&culture=en-US.
(Accessed on December 9).
MarketLine. Costco Wholesale Corporation SWOT Analysis 1-9. Available at:
<http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=e47f8c4d-33ea-4068-
8c09-3cbf50b57c91%40sessionmgr110&vid=4&hid=120> (December 9)
Greenhouse, Steven. 2010. How Costco Became the Anti-Wal-Mart. The New York Times.
Available at:
<http://www.nytimes.com/2005/07/17/business/yourmoney/17costco.html?pag
ewanted=1&_r=1&> (December 9)
“Form 10-K” Form 10-K. 2012. Securities and Exchange Commission. Available at:
http://www.sec.gov/Archives/edgar/data/909832/000119312512428890/d3880
97d10k.htm#tx388097_28
"Costco Connection - February 2013." Kirkland Signature. Available at:
<http://www.costcoconnection.com/connection/201312#pg1>
Costco Terms and Conditions of Use. Available at: <http://www.costco.com/terms-and-
conditions-of-use.html>
Trefis. “How does Costco Make Money” Available at:
<http://www.trefis.com/stock/cost/articles/161496/how-does-costco-make-
money/2013-01-07>
Morningstar. Target Growth, Profitablity and Financial Ratios.
Stone, Brad. Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World.
Available at: <http://www.businessweek.com/articles/2013-06-06/costco-ceo-
craig-jelinek-leads-the-cheapest-happiest-company-in-the-world>

22. 21
Prior, Ana. 2013. WSJ Online. Costco Shines Amid Otherwise Lackluster Same-Store Results.
Available at:
<http://online.wsj.com/news/articles/SB10001424127887324123004579056961
676026596>