Costco Financial Statement Analysis Research Paper

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Introduction

The company started its operations in 1983 in Seattle, Washington DC (Form 10-K,” 2009, p.2). Costco is known to be the largest wholesale membership club in the U.S. It is ranked as the third largest retailer in the United States and the ninth largest in the world, according to statistics released on July 2009. Apart from its headquarters in Seattle, the corporation has other locations in the United Kingdom, Canada, Australia, Mexico, Taiwan, South Korea, and Japan. As of 1993, Costco merged with Price Club because its business model and size were similar. This move doubled the size of the parent companies. The successful merger resulted in a change of name to the company formed, and it became known as PriceCostco. The company was also enjoying a healthy business. For example, it received $ 16 billion in terms of annual sales. In December 1994, some executives of the company left PriceCostco and founded Price Enterprises. Three years later, the organization rebranded by way of changing its name. It would now be referred to as Costo Wholesale. In 1999, the company was on the move again, this time to Washington. Here, it assumed a new name altogether; Costco Wholesale Corporation. The company’s stocks trades in the NASDAQ Global Select Market as “COST.”

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Costco enjoys higher total sales compared to some of its competitors such as Sam’s Club. Its part-time as well as full time employees are estimated to be approximately 142,000. The total membership numbers for the organization stood at approximately 55 million members as of 2009. In addition, the organization realized $ 1.42 billion in terms of total sales the same year. On the other hand, the company’s net profit for the same period was $ 1.28 billion (Form 10 – K, 2009, p.48). Costco is ranked number 24 on the Fortune 500 with the ACSI labeling it as the number one corporation in the specialty retail store industry as of 2008. The company is also the first company to realize a $3 billion growth in revenue in less than six years.

In order to operate the company in a way that recognizes the central role played by the organization within the society, Costco produces an annual Corporate Social Responsibility (CSR) report. Additionally, in order to allow for financing, investment and taxation, Costco’s management prepares financial statements that auditors must analyze and report their findings.

Financial Statement Analysis for Costco Wholesale Corporation

The Corporate Social Responsibility (CSR) report, 2009

Corporate social responsibility can be regarded as a commitment by a company geared towards improvement of the community through use of the business resources for discretionary business activities (Kotler & Lee, 2005, p.3). In the 2007-2008 CSR report, Costco reports that it has been supporting the environment by use of skylights, metal energy- efficient buildings and re-use of boxes instead of bags among other innovative practices. The formation of Cotoco Energy Group alongside with its corporate sustainability wing endeavored to look into the development and implementation of the energy policies (DiBenedetto, 2009, para. 6). The company also found out that purchased energy equaled 84% of its carbon footprints in 2007. This forced Costco to put special emphasis on using building designs that are energy –efficient in addition to installation of photovoltaic solar panels on its Hawaii warehouse roof.

By August 2008, the company had installed 14 large scale pilot photovoltaic power systems in California and Hawaii (DiBenedetto, 2009, para.9). These projects had a combined power output of about 7 megawatts. By the end of 2008, five more systems had been installed. Furthermore, the organization employs means of production that are economical, environmentally friendly and at the same time, sustainable within the social setting. At the moment, the organization has embarked on a mission to track what are known as GHG emissions, although this project is still in its infancy stage. This is with a view to realizing ways and means thorough which the organization can lower emissions (Fridson & Alvarez, 2002, p. 34). Considering that the company owns about 543 warehouses worldwide, the efforts made so far concerning energy conservation are far from enough. As stated in Form 10 – K for the year 2009, the company is still far from effectively managing most other environmental concerns. Regulations restricting land use in building new warehouses is still a big problem facing the company. This is due to the fact that most local governments still do not approve of the company’s operations and environmental concerns.

The Auditor’s Report

This report symbolizes a formal opinion of auditors regarding the financial health of the organization. Usually, the report is provided by external or internal auditors to the firm following a successful auditing of the organization. Afterwards, the report finds its way to other agencies, such as the government. This is move is more of an assurance that the financial health of the organization in question is not in dispute. It is worth noting that the report is only an auditor’s opinion on whether the information provided in the financial statement is correct. The auditor detects any material misstatements and leaves all the other determinations to be made by the external user. Although auditing reports are categorized into four major classes, the two most commonly encountered reports are as discussed below:

Unqualified Opinion Report

This is a report that is more frequently encountered by most users also referred to as the clean opinion. This report is issued by an auditor after the financial statements audited have indicated no signs of material misstatements. These statements must also be presented in accordance with the Generally Accepted Accounting Principles (GAAP). The outline of this report starts with a title. Then, it is followed by a header. Following the header is the actual body of the report. This is then followed by the signature of an auditor, along with his/her address. Thereafter, the date of issuing the report is provided. There are three main paragraphs that define the body of the auditor’s report. For each one of these three paragraphs, a common trend is that they are all characterized by a unique style of wording and standards. In addition, they all appear destined to fulfill an individual purpose. In the first paragraph, attention is given to the work that is already audited. Further, the paragraph spells out the auditor’s role in relation to that of the auditee in as far as the organization’s financial statements are concerned.

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In the second paragraph of the report, the scope of the work being audited is provided in details. In this case, the work to be performed is described in general terms. In addition, the procedures to be employed are also highlighted. Further, any possible handicaps to the auditing exercise are also examined. This paragraph also states whether the audit was performed in accordance to the GAAP guidelines. The third paragraph also known as the opinion paragraph contains the auditor’s opinion on the financial statement and indicates whether statement has been prepared in accordance with the GAAP standards.

Qualified Opinion Report

This report is filed when the auditor encounters one or two situations that indicate deviation from the GAAP regulations. In this case, the rest of the financial statement is usually fairly presented. The opinion of the auditor is otherwise the same as in an unqualified report except that the auditor must indicate that there are some exceptions which are otherwise misstated. The two most common situations encountered in this case are, single deviation from GAAP which is when one or more areas of the financial report do not conform to GAAP and the other is limitation of scope. Limitation of scope arises when the auditor is unable to audit one or more areas of the financial statement. This paragraph must appear before the opinion paragraph.

Role of Costco’s Auditors

Auditing can be defined as the process of evaluating evidence regarding principles about certain economic situations to ascertain the extent to which they have been employed in relation to the established regulations (Jaffrey, 2002, para.1). The Costco Company’s auditors are charged with the responsibility of auditing the consolidated balance sheets, subsidiaries and the related consolidated statements of income, stockholder’s equity and the comprehensive income and cash flows at the end of each fiscal year. This process is carried out in accordance with the generally accepted auditing principles and it is meant to single out any situations of misstatements and deviations from GAAP in preparing the financial statements (Form 10 K, 2009. p.43). The auditors must also audit the Company’s internal control over financial reporting based on the standards of the Public Company Oversight Board (United States) and the Committee of Sponsoring Organization of the Tread way Commission (COSO).

How important is the auditor’s report the parties involved?

It is important to note that the auditor’s report acts as an opportunity for players in the industry under scrutiny to gain a better understanding of how financial reporting is impacted on by internal controls. In this case, the report seeks to indicate how the issues of reliability should be pursued while financial statements are being prepared. The same case also applies when financial reports are being released. The report also indicates the effectiveness of the management in its responsibility to maintain records that show the Company’s transactions and deposition of assets. Moreover, the reports also acts as an assurance that the various transactions that a business entity engages in have all been recorded as a way of enabling the financial statement preparation according to the stipulations of GAAP. Further, it is also an assurance that expenditures and receipts incurred by an organization are prepared following the right channels of authority (Form 10 K, 2009, p.39).

The report is also important in that it gives assurance regarding the timely detection of any unauthorized practices by the management which in effect may have adverse financial consequences on the Corporation. The government, which is the major external user of such reports, is also given the opportunity to ascertain whether the information supplied regarding income taxes is true.

Conclusion

Financial statement analysis is an essential tool in many fields including investment management, corporate finance, and commercial lending and even in credit extension. Thus for individuals involved in this activity, it is important to follow the prescribed principles since financial statements can conceal more than they can reveal. And due to the importance of audit reports generated after auditing, the analyst should follow a proactive approach in producing reliable results.

Reference List

DiBenedetto, B. (2009). Costco dives into product sustainability. Web.

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Form 10-K. (2009). Annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934: Costco Wholesale Corporation. United States Securities and Exchange Commission: Washington, DC. Web.

Fridson, M., & Alvarez, F. (2002). Financial statement analysis: a practitioner’s guide, 3rd edn. Toronto: John Wiley & Sons, Inc.

Jaffrey, S. A. (2002). Role of auditors in managing good corporate governance: auditing. Web.

Kotler, P., & Lee, N. (2005). Corporate social responsibility: doing the most good for your company and your cause. Toronto: Wiley & Sons, Inc.

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