Question

Q:

Please review the Income Statement and Balance Sheet
Prepare the following analysis:
1)	Calculate Horizontal (Trend) Analysis of the Income Statement and Balance Sheet
2)	Calculate Vertical (Common Size) Analysis of the Income Statement and Balance Sheet
3)	Calculate the Liquidity Ratios only for COSTCO for the most recent (newest) year with a brief explanation of what each reveals to management

COSTCO WHOLESALE CORPORATION
CONSOLIDATED BALANCE SHEET
(amounts in millions)
	ASSETS
CURRENT ASSETS						August 31, 2016		August 31, 2015
	CASH AND CASH EQUIVALENTS					$3,379		$4,801
	SHORT-TERM INVESTMENT					1,350		1,618
	RECEIVABLES, NET					1,252		1,224
	MERCHANDISE INVENTORY					8,969		8,908
	OTHER CURRENT ASSETS					268		228
	TOTAL CURRENT ASSETS					15,218		16,779
PROPERTY AND EQUIPMENT
	LAND					5,395		4,961
	BUILDINGS AND IMPROVEMENTS					13,994		12,618
	EQUIPMENT AND FIXTURES					6,077		5,274
	CONSTRUCTION IN PROGRESS					701		811
						26,167		23,664
	LESS:ACCUMULATED DEPRCIATION AND AMORTIZAITON					(9,124)		(8,263)
	NET PROPERTY AND EQUIPMENT					17,043		15,401
OTHER ASSETS						902		837
	TOTAL ASSETS					$33,163		$33,017
	LIABILITIES AND EQUITY
CURRENT LIABILITIES
	ACCOUNTS PAYABLE					$7,612		$9,011
	CURRENT PORTION OF LONG-TERM DEBT					1,100		1,283
	ACCRUED SALARIES AND BENEFITS					2,629		2,468
	ACCRURED MEMBER REWARDS					869		813
	DEFERRED MEMBERSHIP FEES					1,362		1,269
	OTHER CURRENT LIABILITIES					2,003		1,695
	TOTAL CURRENT LIABILITIES					15,575		16,539
LONG-TERM DEBT, EXCLUDING CURRENT PORTION						4,061		4,852
OTHER LIABILITIES						1,195		783
	TOTAL LIABILITIES					20,831		22,174
SHAREHOLDERS' EQUITY
	PREFERRED STOCK $.005 PAR VALUE; 100,000,000 SHARES AUTHORIZED;
	NO SHARES ISSUED AND OUTSTANDING					-		-
	COMMON STOCK $.005 PAR VALUE; 900,000,000 SHARES AUTHORIZED;
	437,524,000 AND 437,952,000 SHARES ISSUED AND OUTSTANDING					2		2
	ADDITIONAL PAID-IN CAPITAL					5,490		5,218
	ACCUMULATED OTHER COMPREHENSIVE LOSS					(1,099)		(1,121)
	RETAINED EARNINGS					7,686		6,518
	TOTAL COSTCO SHAREHOLDERS EQUITY					12,079		10,617
	NONCONTROLLING INTERESTS					253		226
	TOTAL EQUITY					12,332		10,843
	TOTAL LIABILITIES AND SHAREHOLDERS EQUITY					$33,163		$33,017

COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(amounts in millions)
				August 31, 2016		August 31, 2015		August 31, 2014
REVENUE
NET SALES				116073		113666		110212
MEMBERSHIP FEES				2646		2533		2428
TOTAL REVENUE				118719		116199		112640
OPERATING EXPENSES
MERCHANDISE COSTS				102901		101065		98458
SELLING, GENERAL AND ADMINISTRATIVE				12068		11445		10899
PREOPENING EXPENSES				78		65		63
TOTAL OPERATING EXPENSES				115047		112575		109420
OPERATING INCOME				3672		3624		3220
OTHERE INCOME (EXPENSE)
INCOME EXPENSE				-133		-124		-113
INTEREST INCOME AND OTHER, NET				80		104		90
INCOME BEFORE INCOME TAXES				3619		3604		3197
PROVISION FOR INCOME TAXES				1243		1195		1109
NET INCOME INCLUDING NONCONTROLLING INTERESTS				2376		2409		2088
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS				-26		-32		-30
NET INCOME ATTRIBUTABLE TO COSTCO				2350		2377		2058
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO
BASIC				$5.36		$5.41		$4.69
DILUTED				$5.33		$5.37		$4.65
SHARES USED IN CALCULATION (000's)
BASIC				438585		439455		438693
DILUTED				441263		442716		442485
CASH DIVIDENDS DECLARED PER COMMON SHARE				$1.70		$6.51		$1.33

Answer 1

Horizontal analysis of income statement:

The net sales of the company has increased continuously over the last two years as the net sales of financial year ending on August 31, 2014 was $110212 which increased to $113666 in financial year ending on August 31, 2015 and further to $116073 in 2015-16. Similarly the membership fees have also increased year after in the last three years as can be seen from the income statement.

The operating income of the company in the financial year 2015-16 of $3672 is highest in the last three years. Income before taxes have also increase in 2015-16 with $3619 compare to $3197 of 2013-14 and $3604 of 2014-15. However, net income of the company has reduced in 2015-16 at $2350 compare to $2377 of 2014-15. Basic and diluted earnings per share both have reduced in 2015-16 at $5.36 and $5.33 respectively in 2015-16 compare to $5.41 and $5.37 respectively of 2014-15.

Vertical analysis of income statement:

The total operating income 2015-16 of the company has been $118719 with operating expenses of $115047. Thus, the operating income of the company for the year has been $3672. The income before taxes for the year 2015-16 is $3619.

Calculation of liquidity ratios:

Current ratio:

Current ratio is calculated to assess the ability of an organization to pay off its current liabilities by using its current assets only. It helps to assess the working capital sufficiency of an organization.

	31st August, 2016	31st August, 2015
Total current assets	15218	16779
Total current liabilities	15575	16539
Current ratio (Current assets / Current liabilities)	0.977079	1.014511

Acid test ratio: It is even more liquid version with current assets less inventories are considered to assess the sufficiency to pay off the current liabilities from such liquid acid.

	31st August, 2016	31st August, 2015
Total current assets less inventories	6249	7871
Total current liabilities	15575	16539
Current ratio (Current assets / Current liabilities)	0.40122	0.475905