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Accounting Powerpoint Presentation And Sec 10-K Report

Accounting Powerpoint presentation and Report

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COSTCO SEC REPORT 9

SEC Report:

Costco Wholesale Corporation

Fiscal Year Ended August 28, 2016

Professor’s Name:

Course Name

Costco Wholesale Corporation

Introduction and Company Background

The Costco Wholesale Corporation began as a single warehouse in Seattle, WA in 1983. As of August 28, 2016, Costco owned 715 stores across 10 countries. Focusing primarily on the selling of merchandise, Costco purchases products directly from national branded manufacturers who then ship their products directly to Costco warehouses; eliminating costly and slow processes associated with multi-step supply channels. The overall theme of Costco’s business practice is allowing shoppers to save money through buying produce, meats, and other merchandise in bulk quantities. This gives shoppers the opportunity to purchase more quantity at a cheaper price than a normal grocery store or outlet store can offer (Costco Wholesale Corporation, 2016).

The company incorporates the use of membership fees, meaning that people must first purchase a membership card to buy merchandise – another form of revenue for Costco. Costco sends out yearly monetary rewards to its members based on the percentage of that individuals purchases over the year; the rewards max out at $750 and the percentage is based on the tier of membership purchased by the customer (Costco Wholesale Corporation, 2016).

Costco offers common stock and trades on the NASDAQ Global Select market under the symbol “COST.” As a company that continues to grow and remain successful because of its quality merchandise and unique shopping experience, Costco’s common stock has shown steady growth and has become a reliable choice in the stock market (Costco Wholesale Corporation, 2016).

Income Statement

An income statement is a mandatory portion of a financial report and it details a company’s revenues and expenses from operating and non-operating activities for a certain time period (Walther, 2012). Costco’s consolidated statements of income showed that the company has progressively increased revenue each year since 2014; earning at least 2.5 billion dollars more than each previous year. Since Costco placed a concerted effort on growth in 2016, it can be expected that 2017 will yield even more revenue than ever before. In FY 2016, Costco closed out at $118,719 (million) of total revenue and a net income of $2,350 (million); a contributing factor that makes Costco a serious competitor in merchandise sales. Net income decreased from 2015 to 2016 by $27 million, which is a hit on Costco’s profits, but this was likely due to management shifts and preopening expenses needed to accommodate the opening of 26 new warehouses in 2016. Expenses increased each year leading into 2016, but the increases were small – approximately $500 million increases each year. These expenses pale in comparison to Costco’s steady profit growth and expenses associated with opening new storefronts. The subtle increase of expenses and large gains in profit are representative of Costco’s efficiency in logistics and administrative functions (Costco Wholesale Corporation, 2016).

The cash dividends declared per share of common stock was $1.70 at the end of 2016. Dividends declared per share of common stock at the end of FY 2015 was $6.51. This significant decrease from 2015 to 2016 was attributed to the company’s intensive expansion of stores. With 438,535,000 of shares outstanding at the close of FY 2016, Costco payed out approximately $746 million in cash dividends to their stockholders (Costco Wholesale Corporation, 2016).

Balance Sheet

The company’s balance sheet gives a comprehensive breakdown of Costco’s assets, liabilities, and equity. The 2016 balance sheet portrays a positive financial position going into 2017. The corporation’s total assets were $33,163 (million). The bulk of Costco’s assets rest in their property and equipment with a total of $26,167 (million), or 79% of Costco’s total assets. This is no surprise as Costco has a rather large physical footprint across the U.S. and other countries (Costco Wholesale Corporation, 2016).

As of August 28, 2016, total liabilities were at $20,831 (million). While high, liabilities were still overshadowed by total assets giving some indications that Costco has the financial means to pay off their debt. Of note, Costco’s long-term debt was $4,061(million), demonstrating Costco’s publicly announced intentions to lower long-term debt carried from previous years (Costco Wholesale Corporation, 2016).

The stockholders’ equity portion reflects that Costco does not sell or distribute preferred stock to its shareholders, and only offers common stock. Par value for common stocks was $.005 with 900,000,000 authorized and 437,524,000 shares issued and outstanding. Total liabilities and equity totaled $33,163 (million), and retained earnings were an income of $7,686 (million) – retained earnings represent 23% of all liabilities and equity. These retained earnings will likely go towards business development in 2017 as Costco intends to build at least 15 more warehouses (Costco Wholesale Corporation, 2016).

Statement of Cash Flows

The statement of cash flows (CFS) is another required part of a company’s financial reports. It provides information to investors so they understand how a company generates its cash through operations and how that cash is being used, or invested. Cash is a general term used to define cash or similar that will mature in less than 90 days. The statement of cash flows focuses primarily on three areas: operating activities, investing activities, and financing activities (Averkamp, n.d.). Since Costco has international stores, their CFS also includes a segment on exchange rate changes and its effect on cash. Costco’s 2016 operating activities showed net cash of $3,292 (million), a 23% decrease from 2015’s net cash of $4,285 (million). This was caused by Costco’s push to build more warehouses, increasing accounts payable by $2,412 (million) from 2015 to 2016. Costco’s investing activities show that $2,345 (million) were spent on investing, $135 (million) less than 2015. Once again this is conducive to Costco’s geographic expansion, and committing cash to other needs. Costco spent $2,419 (million) in 2016 on financing activities; 47% of this money was contributed to paying off long-term debt – a greater contribution than any previous year (Costco Wholesale Corporation, 2016).

Ratio Analysis

(All calculation amounts in millions, except earnings per share)

Formula

Ratio

Current Ratio

Current Assets / Current Liabilities

15,218 / 15,575 = .98

The current ratio is a measure of a company’s ability to pay off short-term debt. This ratio of .98 is low and shows that Costco has 98 cents for each dollar of liability.

Debt to Total Assets

Total Debt / Total Assets

20,831 / 33,163 = .0628

63%

This is the percentage of assets that are backed by both long and short-term debt. Costco has a high debt to asset ratio, which can be interpreted as a financial risk for investors.

Return on Stockholders Equity

Net Income – Preferred Dividends / Average Common Equity

2,350 – 0 / 12,079 = .194

19.4%

A way for stockholders to measure a company’s earnings performance. Costco’s return on equity is close to 20% making it an appealing investment.

Earnings per Share

Income Available to Common / Weighted-Average Number of Common Shares Outstanding

2,350,000,000 / 437,524,000 = $5.37

EPS represents the amount of earnings stockholder can receive per share of common stock. This EPS shows that each stockholder received $5.37 per share in FY 2016.

Debt to Total Equity

Total Debt / Total Equity

20,831 / 12,332 = 1.69

The debt to equity represents how much debt a company uses to finance its assets compared to the value of the shareholder’s equity (Debt to Equity Ratio, n.d.).

(Walther, 2012).

Horizontal Analysis

(All numbers in millions except percentages)

Balance Sheet

2015

2016

Difference $

Difference %

Receivables, Net

1,224

1,252

28

2%

Receivables are an asset and it is money that customers owe Costco through purchases on account. Receivables have consistently increased from previous years.

Merchandise Inventories

8,908

8,969

61

1%

This is the cost of the amount of inventory on hand. It shows that inventories had a marginal increase, but not enough to be significant.

Cash and Cash Equivalents

4,801

3,379

1,422

30%

This is the amount of cash or other immediately available liquid assets. Costco had a 30% increase of cash. This cash may be used to pay off debt or reinvest back into the company.

Income Statement

2015

2016

Difference $

Difference %

Net Sales

113,666

116,073

2,407

2%

The is the revenue made from Costco’s direct sales. The 2% increase means more revenue was made and 2016 was Costco’s most profitable year since its creation.

Membership Fees

2,533

2,646

113

4.5%

This is the revenue from Costco’s annual membership fees. This shows that in one year, the company was able to increase memberships by 4.5%.

Merchandise Costs

101,065

102,901

1,836

1.8%

Merchandise costs are the expenses used to purchase inventory. This increase is logical because the number of Costco’s warehouses went up, and so did merchandise costs. The more shelves there are to fill means more merchandise is needed.

Vertical Analysis

(All numbers in millions except percentages)

Income Statement Base Account: Total Revenue

Income Statement

Amount

Percentage of Total

Total Revenue

118,719

100%

Net Sales

116,073

(116,073/118,719) * 100 = 97.8%

Preopening Expenses

12,068

(12,068/118,719) * 100 = 10.2%

This vertical analysis show that net sales made up over 97% of Costco’s total revenue. Also, Costco’s preopening expenses were 10.2% of the total revenue. This expense is high and reflects the high number of new Costco stores built and opened in 2016 (Costco Wholesale Corporation, 2016).

Balance Sheet Base Account: Total Assets

Balance Sheet

Amount

Percentage of Total

Total Assets

33,163

100%

Short-term Investments

1,350

(1,350/33,163) * 100 = 4%

Buildings and Improvements

13,994

(13,994/33,163) * 100 = 42.2%

This shows that Costco’s short term investments made up only 4% of the total assets. Buildings and improvements to current structures are almost half of the total assets. As stated before, this is congruent to number large facilities built last year (Costco Wholesale Corporation, 2016).

Competitive Analysis

Costco continues to be a profitable business, for the welfare of the customers’ and the company, and for the investors. The corporation continues to offer low prices and, because of this, continues to grow its members; a steady form of revenue. Costco is not a household name in every state yet, but it still challenges the big name companies like Target and Amazon each year as its assets and revenues increase with each fiscal year. Costco remains consistently strong in its growth because the company expands using only the money from its retained earnings, which was over $7.5 billion in 2016; over a billion more than 2015. This good business practice allows for steady progress without accumulating unnecessary amounts of long-term debt. With a current stock price of $170.77 per share (as of April 23, 2017), the profitability and investor interest drives this company towards future success (Nasdaq, 2017).

Conclusion

While Costco has been around for over three decades, it is still a growing company. Costco continues to adapt to business habits just like its competitors. While 2016 may not have been as profitable as most investors would have hoped, it is almost irrelevant due to the company’s expansion. The Costco leadership envisions creating a merchandise dynasty over the next few years; the financial handlings of 2016 was a calculated move towards this vision. Over time, as revenue can catch up with the geographic footprint of Costco and the new warehouses, this company will set itself apart by its original business practices and its high standard for quality control. It is reasonable to expect that Costco will continue to grow as the leader for bulk merchandise sellers in the future. Many stores attempt to replicate Costco’s environment and quality, but most have fallen short; making Costco an example for others to follow and emulate.

References

Averkamp, H. (n.d.). Cash flow statement. Retrieved from https://www.accountingcoach.com/cash-flow-statement/explanation/1

Costco Wholesale Corporation. (2016). SEC 10-K report: Costco Wholesale Corporation. Retrieved from http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTExMTc3MzIyJkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3

Debt to Equity Ratio. (n.d.). What is the ‘debt/equity ratio?’ Retrieved from http://www.investopedia.com/terms/d/debtequityratio.asp

Nasdaq. (2017). Costco Wholesale Corporation earnings per share. Retrieved from http://www.nasdaq.com/symbol/cost/eps-forecast

Stock Analysis on Net. (2017). Costco Wholesale Corp. Retrieved from https://www.stock-analysis-on.net/NASDAQ/Company/Costco-Wholesale-Corp/Valuation/Ratios

Walther, L. (2012). Principles of accounting: Chapter 16 in ACCT301. Powerpoint posted in UMUC ACCT 301 7980 online classroom, archived at: http://learn.umuc.edu