MNC Report- Costco Wholesale Corporation
Costco Wholesale Corporation has several subsidiaries and which started its operation in 1983. The business started in Seattle. The corporation’s primary functions include the operation of membership warehouses in countries such as Puerto Rico, the United States, Mexico, the United Kingdom, Spain, Australia, and Japan. It also operates via subsidiaries that are owned by the majority in Korea and Taiwan. The company is found to trade on the NASDAQ, where its symbol is “COST.” Further, Costco Corporation has online presence and business with a website that serves nations such as Canada, the US, Mexico, and the UK.
Costco corporation is involved in the breakdown of its segment for operations. They include Canadian operations, the United States operations, alongside other several global operations. Costco’s reportable segments are mainly in terms of the organizational management of all operating segments for decisions on operation and evaluation of the company’s financial performance. Calculation of total revenue and operating income is arrived at by eliminating all material net sales and expenses of the inter-segments. Some of the operating expenses that mainly include stock-based compensation are usually incurred on behalf of the organization’s operations in Canada and other operations globally. However, the operating expenses are usually included the company’s operations in the US since such expenses are not allocated internally. They typically come under the responsibility of the firm’s management team based in the US.
A lease refers to a contract that outlines the terms that a given party concurs to rent a particular property that is owned by a different party. It assures the lessee or tenant the use of a given asset. It also assures the property owner or lessor or the landlord constant payments in a given time. Both the lessor and lessee experience repercussions when they do not keep the terms of the established contract. The operations of Costco include the leasing of buildings and land at the warehouse. It also leases other distribution and office facilities mainly under operating leases.
Operating lease is described as the contract that permits the utilization of a given asset, although it fails to pass rights of ownership of the asset. It is perceived as a type of off-balance-sheet financing since a leased asset, and any obligations are not involved in the balance sheet of a company. Operating leases of the Costco are designed to expire at multiple dates through the year 2064. The only exception is one lease in the firm’s subsidiary based in the UK, which is expected to expire in the year 2151. Generally, the leases have one or more of the options identified below. Costco can exercise them at the of the first lease. Renewal of a lease is the first option for the company. The renewal is for a particular period, which is based on the prevailing fair market rental rate. It is based on the stipulated rate when the lease is agreed upon. The next option involves property purchase based on the existing market value when the lease is agreed upon. The last and third option for the lease involves the right of initially declining the lease when there is a purchase offer to a third party.
Costco corporate usually engage in capital leases, especially for given warehouse place. The leases usually expire at multiple periods across the year 2040. They are typically included in buildings and lands. Further, the improvements are included in the consolidated statement of financial position. Recording of amortization expense, particularly on capital lease assets, is recorded as depreciation expense. Capital lease obligations are recorded based on two situations; the first includes at lesser of the leased property’s fair market value, or two, the net present value of aggregate lease payments. Further, they are included in current liabilities and deferred payments in the consolidated statement of financial position. When preparing income statement of the company, interests on liabilities are recorded as an expense. The presence of interests of liabilities depicts an increase in the expense item.
The merchandise inventories of the company are usually valued at the market value or lower of cost as it is determined mainly using the retail inventory technique. Besides, merchandise inventories are stated using the LIFO technique for considerably all merchandise inventories in the US. Every quarter of the cycle, Costco records an adjustment whenever required for the estimated inflation or deflation effect. The estimates are usually adjusted to reflect the real outcomes determined, especially at year-end. The company believes that the use of the LIFO method allows the fair presentation of operations’ results since it ensures a close match of current revenues with current costs. For the overall foreign operations, merchandise inventories for the company are mainly valued using the retail inventory approach. They are stated through the use of the LIFO approach.
Estimated inventory losses are offered as a percentage of net sales between physical inventory counts. The provision is then adjusted from period to period to show the results if real physical inventory counts. In general, the physical inventory counts are recorded during the second and fourth quarters of the cycle. Further, the company’s inventory cost is usually reduced by vendor rebates estimates when they are earned or reduced as the firm progresses toward earning the particular rebates. This occurs especially when the rebates depict probability and reasonable estimation. All other considerations from vendors are generally recognized as reducing the cost of merchandise when the terms of the agreement and contractual milestones are completed alongside other rational and systematic approaches.
Fluctuations of rates of currency exchange in the future and that not favorable to Costco corporation are likely to negatively impact the financial performance of the firm’s segments operating in Canada and other global segments. They also have a corresponding negative period to period impact on the segments’ operational outcomes. The company continues to experience exposure to risks of fluctuations when it continues to expand global operations. Fluctuations in rates of foreign exchange are likely to increase. The effect occurs due to changes experienced in foreign currencies in relation to the US dollar. These form the reference point of exchange rates used by the company in the conversion of financial outcomes, especially for global operations. The conversion is necessary to allow financial reporting activities. Calculation of the impacted as a result changes in foreign exchange rates is in terms of the difference between the currency exchange rates of the current period and the comparable currency exchange rates of the previous year’s period. Exposure of the company to financial market threats is attributable to interest rates‘ fluctuations and fluctuations witnessed in foreign currency exchange rates. It is established that the company fails to engage in leveraged o speculative transactions, or it does not issue or hold financial instruments for trading.
Costco’s operational and financial performance largely relies on both Canadian and US operations, which make up 85% and 88% of operating income and net sales in 2015, respectively. In the US market, the company largely relies on California’s operations that make up 31% of the US net sales recorded in 2015. Besides, Costco corporation has a direct relationship of buying with several producers of nationwide brand name merchandise. The company does not obtain any substantial merchandise portion from a single supplier. Primary sources of liquidity for the company include cashflows obtained from warehouse operations. They include short-term investment as well as cash and cash equivalents balances.
The functional currency of Costco is mainly the US dollar. The international subsidiaries of the company use the local currency of the nation in which they are based as the functional currency. Foreign subsidiaries of Costco carry out particular transactions using their nonfunctional currencies. As a result, the company is exposed to exchange rate fluctuations. The fluctuations are usually managed using forward foreign exchange contracts. The approach seeks to attain economic hedging of effects of foreign exchange rate fluctuations, particularly on the known future expenditures that are dominated in a nonfunctional currency of the country. The primary aim of these contracts includes economically hedging the exposure to US dollar expenditures on merchandise inventory. The international subsidiaries usually make the company’s expenditures with other functional currency and not the US dollar.
Costco’s income tax provision is computed in terms of enacted tax rates in the nations the firm serves. Countries depict varying rates of tax. Therefore, a change in earnings due to the multiple jurisdictions in which the subsidiaries operate is likely to contribute to unfavorable transformation in the company’s overall tax provision. In addition, negative results in line with tax audits in the various jurisdictions, such as disputes of transfer pricing, changes witnessed in enacted tax rates, or changes in pronouncements that relate to income tax accounting approach are likely to have a material negative impact on the financial situation and operations’ outcomes.
It was extremely enlightening and interesting to research about Costco. It is one of the leading companies in the industry it serves. Researching about the operations of the company offers key insights that enhance understanding of multiple topics. The concepts of leases, inventory, and financial reporting of the company offer great insights. Most of the researches across the semester covered areas that I would not have managed to explore. Further, it was interesting to read regarding how a multinational corporation operates and its involvement in activities, including currency fluctuations and taxes of different countries. I also established that Costco corporation is nearly not challenged in the market it serves when compared to other market players.