Question

Please search and review COSTCO financial statements and notes to financial statement for fiscal year 1998 and fiscal year 1999.

• For the year ended in August 1998, how much and how were membership fees recorded in COSTCO's financial statements? How much net income were reported for fiscal year 1998?
• Was membership fee recorded correctly? If not, what accounting principle does it violate? Why? How did they fix it?
• What were the effects of the fix? How much net income would have been reported for fiscal year 1998?

Answer 1

In financial statements for the year ended 1998, COSTCO recorded following membership fees and net income:-

Membership fees Year 1998

Particulars	Amount	Net Income
First quarter	108507	97926
second quarter	97908	125993
third quarter	96160	85227
fourth quarter	136922	150696
Total	439497	459842

In these statements, membership fees was recorded on cash basis , that is whole amount was recorded as income in the first year in which it is received. In this example , the annual membership fee was received for one year which include some years of 1998 and some years of 1999. but the whole amount was shown as income in year 1998 itself.

according to the guidelines of securities and exchange commission , membership fees should be recorded on deferred basis, that is for the period for which a member will receive the services by paying membership fees.

hence, they should have recorded membership fees on deferred basis instead of cash basis.

The company rectified this mistake by changing accounting method for membership fees from cash basis to deferred basis , effective from first quarter of 1999 onward. They also made changes in pre-tax charged because of this change.(one-time, noncash pre-tax charge of approximately $197,000 ($118,000 after-tax, or $.50 per share))

If they have applied this method from 1998 onwards , net income would have been $444,451, or $1.96 per share (diluted).