Microsoft Excel LibreOffice Calc

Analysis of Inventory

Difficulty: Advanced


Inventory Accounting Policy

Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. Costco believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. Costco records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels for the year have been determined. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the first-in, first-out (FIFO) basis.

As of September 2, 2018 and September 3, 2017, U.S. merchandise inventories valued at LIFO approximated FIFO after considering the lower of cost or market principle. Due to net deflation, a benefit of $64 was recorded to merchandise costs in 2016.

Costco provides for estimated inventory losses between physical inventory counts as a percentage of net sales, using estimates based on Costco's experience. The provision is adjusted periodically to reflect physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as Costco progresses towards earning those rebates, provided that they are probable and reasonably estimable.

Source: 10-K (filing date: 2018-10-26).


Inventory Disclosure

Costco Wholesale Corp., Statement of Financial Position, Inventory

USD $ in millions

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Sep 2, 2018 Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013
United States 8,081  7,091  6,422  6,427  5,952  5,560 
Canada 1,189  1,040  1,015  –  –  – 
Other International 1,770  1,703  1,532  2,481  2,504  2,334 
Merchandise inventories 11,040  9,834  8,969  8,908  8,456  7,894 

Based on: 10-K (filing date: 2018-10-26), 10-K (filing date: 2017-10-18), 10-K (filing date: 2016-10-12), 10-K (filing date: 2015-10-14), 10-K (filing date: 2014-10-15), 10-K (filing date: 2013-10-16).

Item Description The company
Merchandise inventories Amount after valuation and LIFO reserves of inventory expected to be sold, or consumed within one year or operating cycle, if longer. Costco Wholesale Corp.'s merchandise inventories increased from 2016 to 2017 and from 2017 to 2018.

Adjustment to Inventory: from LIFO to FIFO

Adjusting LIFO Inventory to FIFO (Current) Cost

USD $ in millions

Microsoft Excel LibreOffice Calc
Sep 2, 2018 Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013
Adjustment to Merchandise Inventories
Merchandise inventories at LIFO (as reported) 11,040  9,834  8,969  8,908  8,456  7,894 
Add: Inventory LIFO reserve –  (64) –  82  109  81 
Merchandise inventories at FIFO (adjusted) 11,040  9,770  8,969  8,990  8,565  7,975 
Adjustment to Current Assets
Current assets (as reported) 20,289  17,317  15,218  17,299  17,588  15,840 
Add: Inventory LIFO reserve –  (64) –  82  109  81 
Current assets (adjusted) 20,289  17,253  15,218  17,381  17,697  15,921 
Adjustment to Total Assets
Total assets (as reported) 40,830  36,347  33,163  33,440  33,024  30,283 
Add: Inventory LIFO reserve –  (64) –  82  109  81 
Total assets (adjusted) 40,830  36,283  33,163  33,522  33,133  30,364 
Adjustment to Total Costco Stockholders' Equity
Total Costco stockholders' equity (as reported) 12,799  10,778  12,079  10,617  12,303  10,833 
Add: Inventory LIFO reserve –  (64) –  82  109  81 
Total Costco stockholders' equity (adjusted) 12,799  10,714  12,079  10,699  12,412  10,914 
Adjustment to Net Income Attributable To Costco
Net income attributable to Costco (as reported) 3,134  2,679  2,350  2,377  2,058  2,039 
Add: Increase (decrease) in inventory LIFO reserve 64  (64) (82) (27) 28  (27)
Net income attributable to Costco (adjusted) 3,198  2,615  2,268  2,350  2,086  2,012 

Based on: 10-K (filing date: 2018-10-26), 10-K (filing date: 2017-10-18), 10-K (filing date: 2016-10-12), 10-K (filing date: 2015-10-14), 10-K (filing date: 2014-10-15), 10-K (filing date: 2013-10-16).

Costco Wholesale Corp.'s inventory value on Sep 2, 2018 would be $11,040  (in millions) if the FIFO inventory method was used instead of LIFO. Costco Wholesale Corp.'s inventories, valued on a LIFO basis, on Sep 2, 2018 were $11,040 . Costco Wholesale Corp.'s inventories would have been $–  higher than reported on Sep 2, 2018 if the FIFO method had been used instead.


Costco Wholesale Corp., Financial Data: Reported vs. Adjusted


Adjusted Ratios: LIFO vs. FIFO (Summary)

Costco Wholesale Corp., adjusted ratios

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Sep 2, 2018 Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013
Current Ratio
Reported current ratio (LIFO) 1.02 0.99 0.98 1.05 1.22 1.19
Adjusted current ratio (FIFO) 1.02 0.99 0.98 1.05 1.23 1.20
Net Profit Margin
Reported net profit margin (LIFO) 2.26% 2.12% 2.02% 2.09% 1.87% 1.98%
Adjusted net profit margin (FIFO) 2.31% 2.07% 1.95% 2.07% 1.89% 1.96%
Total Asset Turnover
Reported total asset turnover (LIFO) 3.39 3.47 3.50 3.40 3.34 3.40
Adjusted total asset turnover (FIFO) 3.39 3.48 3.50 3.39 3.33 3.39
Financial Leverage
Reported financial leverage (LIFO) 3.19 3.37 2.75 3.15 2.68 2.80
Adjusted financial leverage (FIFO) 3.19 3.39 2.75 3.13 2.67 2.78
Return on Equity (ROE)
Reported ROE (LIFO) 24.49% 24.86% 19.46% 22.39% 16.73% 18.82%
Adjusted ROE (FIFO) 24.99% 24.41% 18.78% 21.96% 16.81% 18.44%
Return on Assets (ROA)
Reported ROA (LIFO) 7.68% 7.37% 7.09% 7.11% 6.23% 6.73%
Adjusted ROA (FIFO) 7.83% 7.21% 6.84% 7.01% 6.30% 6.63%

Based on: 10-K (filing date: 2018-10-26), 10-K (filing date: 2017-10-18), 10-K (filing date: 2016-10-12), 10-K (filing date: 2015-10-14), 10-K (filing date: 2014-10-15), 10-K (filing date: 2013-10-16).

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by current liabilities. Costco Wholesale Corp.'s adjusted current ratio improved from 2016 to 2017 and from 2017 to 2018.
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Costco Wholesale Corp.'s adjusted net profit margin improved from 2016 to 2017 and from 2017 to 2018.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Costco Wholesale Corp.'s adjusted total asset turnover deteriorated from 2016 to 2017 and from 2017 to 2018.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Costco Wholesale Corp.'s adjusted financial leverage increased from 2016 to 2017 but then slightly declined from 2017 to 2018.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Costco Wholesale Corp.'s adjusted ROE improved from 2016 to 2017 and from 2017 to 2018.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Costco Wholesale Corp.'s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018.

Costco Wholesale Corp., Ratios: Reported vs. Adjusted


Adjusted Current Ratio

Microsoft Excel LibreOffice Calc
Sep 2, 2018 Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013
As Reported
Selected Financial Data (USD $ in millions)
Current assets 20,289  17,317  15,218  17,299  17,588  15,840 
Current liabilities 19,926  17,495  15,575  16,540  14,412  13,257 
Ratio
Current ratio1 1.02 0.99 0.98 1.05 1.22 1.19
Adjusted: from LIFO to FIFO
Selected Financial Data (USD $ in millions)
Adjusted current assets 20,289  17,253  15,218  17,381  17,697  15,921 
Current liabilities 19,926  17,495  15,575  16,540  14,412  13,257 
Ratio
Adjusted current ratio2 1.02 0.99 0.98 1.05 1.23 1.20

Based on: 10-K (filing date: 2018-10-26), 10-K (filing date: 2017-10-18), 10-K (filing date: 2016-10-12), 10-K (filing date: 2015-10-14), 10-K (filing date: 2014-10-15), 10-K (filing date: 2013-10-16).

2018 Calculations

1 Current ratio = Current assets ÷ Current liabilities
= 20,289 ÷ 19,926 = 1.02

2 Adjusted current ratio = Adjusted current assets ÷ Current liabilities
= 20,289 ÷ 19,926 = 1.02

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by current liabilities. Costco Wholesale Corp.'s adjusted current ratio improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Net Profit Margin

Microsoft Excel LibreOffice Calc
Sep 2, 2018 Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013
As Reported
Selected Financial Data (USD $ in millions)
Net income attributable to Costco 3,134  2,679  2,350  2,377  2,058  2,039 
Net sales 138,434  126,172  116,073  113,666  110,212  102,870 
Ratio
Net profit margin1 2.26% 2.12% 2.02% 2.09% 1.87% 1.98%
Adjusted: from LIFO to FIFO
Selected Financial Data (USD $ in millions)
Adjusted net income attributable to Costco 3,198  2,615  2,268  2,350  2,086  2,012 
Net sales 138,434  126,172  116,073  113,666  110,212  102,870 
Ratio
Adjusted net profit margin2 2.31% 2.07% 1.95% 2.07% 1.89% 1.96%

Based on: 10-K (filing date: 2018-10-26), 10-K (filing date: 2017-10-18), 10-K (filing date: 2016-10-12), 10-K (filing date: 2015-10-14), 10-K (filing date: 2014-10-15), 10-K (filing date: 2013-10-16).

2018 Calculations

1 Net profit margin = 100 × Net income attributable to Costco ÷ Net sales
= 100 × 3,134 ÷ 138,434 = 2.26%

2 Adjusted net profit margin = 100 × Adjusted net income attributable to Costco ÷ Net sales
= 100 × 3,198 ÷ 138,434 = 2.31%

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Costco Wholesale Corp.'s adjusted net profit margin improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Sep 2, 2018 Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013
As Reported
Selected Financial Data (USD $ in millions)
Net sales 138,434  126,172  116,073  113,666  110,212  102,870 
Total assets 40,830  36,347  33,163  33,440  33,024  30,283 
Ratio
Total asset turnover1 3.39 3.47 3.50 3.40 3.34 3.40
Adjusted: from LIFO to FIFO
Selected Financial Data (USD $ in millions)
Net sales 138,434  126,172  116,073  113,666  110,212  102,870 
Adjusted total assets 40,830  36,283  33,163  33,522  33,133  30,364 
Ratio
Adjusted total asset turnover2 3.39 3.48 3.50 3.39 3.33 3.39

Based on: 10-K (filing date: 2018-10-26), 10-K (filing date: 2017-10-18), 10-K (filing date: 2016-10-12), 10-K (filing date: 2015-10-14), 10-K (filing date: 2014-10-15), 10-K (filing date: 2013-10-16).

2018 Calculations

1 Total asset turnover = Net sales ÷ Total assets
= 138,434 ÷ 40,830 = 3.39

2 Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= 138,434 ÷ 40,830 = 3.39

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Costco Wholesale Corp.'s adjusted total asset turnover deteriorated from 2016 to 2017 and from 2017 to 2018.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Sep 2, 2018 Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013
As Reported
Selected Financial Data (USD $ in millions)
Total assets 40,830  36,347  33,163  33,440  33,024  30,283 
Total Costco stockholders' equity 12,799  10,778  12,079  10,617  12,303  10,833 
Ratio
Financial leverage1 3.19 3.37 2.75 3.15 2.68 2.80
Adjusted: from LIFO to FIFO
Selected Financial Data (USD $ in millions)
Adjusted total assets 40,830  36,283  33,163  33,522  33,133  30,364 
Adjusted total Costco stockholders' equity 12,799  10,714  12,079  10,699  12,412  10,914 
Ratio
Adjusted financial leverage2 3.19 3.39 2.75 3.13 2.67 2.78

Based on: 10-K (filing date: 2018-10-26), 10-K (filing date: 2017-10-18), 10-K (filing date: 2016-10-12), 10-K (filing date: 2015-10-14), 10-K (filing date: 2014-10-15), 10-K (filing date: 2013-10-16).

2018 Calculations

1 Financial leverage = Total assets ÷ Total Costco stockholders' equity
= 40,830 ÷ 12,799 = 3.19

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total Costco stockholders' equity
= 40,830 ÷ 12,799 = 3.19

Ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Costco Wholesale Corp.'s adjusted financial leverage increased from 2016 to 2017 but then slightly declined from 2017 to 2018.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Sep 2, 2018 Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013
As Reported
Selected Financial Data (USD $ in millions)
Net income attributable to Costco 3,134  2,679  2,350  2,377  2,058  2,039 
Total Costco stockholders' equity 12,799  10,778  12,079  10,617  12,303  10,833 
Ratio
ROE1 24.49% 24.86% 19.46% 22.39% 16.73% 18.82%
Adjusted: from LIFO to FIFO
Selected Financial Data (USD $ in millions)
Adjusted net income attributable to Costco 3,198  2,615  2,268  2,350  2,086  2,012 
Adjusted total Costco stockholders' equity 12,799  10,714  12,079  10,699  12,412  10,914 
Ratio
Adjusted ROE2 24.99% 24.41% 18.78% 21.96% 16.81% 18.44%

Based on: 10-K (filing date: 2018-10-26), 10-K (filing date: 2017-10-18), 10-K (filing date: 2016-10-12), 10-K (filing date: 2015-10-14), 10-K (filing date: 2014-10-15), 10-K (filing date: 2013-10-16).

2018 Calculations

1 ROE = 100 × Net income attributable to Costco ÷ Total Costco stockholders' equity
= 100 × 3,134 ÷ 12,799 = 24.49%

2 Adjusted ROE = 100 × Adjusted net income attributable to Costco ÷ Adjusted total Costco stockholders' equity
= 100 × 3,198 ÷ 12,799 = 24.99%

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Costco Wholesale Corp.'s adjusted ROE improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Sep 2, 2018 Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013
As Reported
Selected Financial Data (USD $ in millions)
Net income attributable to Costco 3,134  2,679  2,350  2,377  2,058  2,039 
Total assets 40,830  36,347  33,163  33,440  33,024  30,283 
Ratio
ROA1 7.68% 7.37% 7.09% 7.11% 6.23% 6.73%
Adjusted: from LIFO to FIFO
Selected Financial Data (USD $ in millions)
Adjusted net income attributable to Costco 3,198  2,615  2,268  2,350  2,086  2,012 
Adjusted total assets 40,830  36,283  33,163  33,522  33,133  30,364 
Ratio
Adjusted ROA2 7.83% 7.21% 6.84% 7.01% 6.30% 6.63%

Based on: 10-K (filing date: 2018-10-26), 10-K (filing date: 2017-10-18), 10-K (filing date: 2016-10-12), 10-K (filing date: 2015-10-14), 10-K (filing date: 2014-10-15), 10-K (filing date: 2013-10-16).

2018 Calculations

1 ROA = 100 × Net income attributable to Costco ÷ Total assets
= 100 × 3,134 ÷ 40,830 = 7.68%

2 Adjusted ROA = 100 × Adjusted net income attributable to Costco ÷ Adjusted total assets
= 100 × 3,198 ÷ 40,830 = 7.83%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Costco Wholesale Corp.'s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018.