Like any retail company, Costco knows that some customers will return merchandise after the sale. When a June sale is returned in July, both the sale and the sales return are recorded in the same fiscal year. A problem occurs, however, when a sale in August (Costco's fiscal year end) is returned in September. The sale is recorded in one fiscal year while the sales return is recorded in the next fiscal year. To solve this problem, Costco estimates the amount of its current-year sales it expects to be returned in the fiscal year. This procedure attempts to make sales and sales returns in the same fiscal year.

Instructions: 

Read the first paragraph of the Revenue Recognition section of Note 1 in Costco's financial statements in Appendix B of this textbook.

1. How does Costco estimate sales returns?

2. Identify the amount of the reserve for sales returns reported on the 2006 financial statements. How is the amount reported on the financial statements?

Data from Appendix B

Transcribed Image Text:

COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 1-Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Costco Wholesale Corporation, a Washington corporation, and its subsidiaries ("Costco" or the "Company"). All material inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation. Costco operates membership warehouses that offer low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories in no-frills, self- service warehouse facilities. At September 3, 2006, Costco operated 487 warehouses: 354 in the United States and four in Puerto Rico; 68 in Canada; 18 in the United Kingdom; 5 in Korea; 4 in Taiwan; 5 in Japan; and 29 warehouses in Mexico (through a 50%-owned joint venture). The Company's investments in the Costco Mexico joint venture and in other unconsolidated joint ventures that are less than majority owned are accounted for under the equity method. The investment in Costco Mexico is included in other assets and was $270,304 at September 3, 2006 and $232,402 at August 28, 2005. The equity in earnings of Costco Mexico is included in interest income and other in the accompanying consolidated statements of income, and for fiscal 2006, 2005 and 2004, was $26,646, $24,949 and $22,208, respectively. The amount of retained earnings that represents undistributed earnings of Costco Mexico was $159,877 and $133,231 at September 3, 2006 and August 28, 2005, respectively. The Company, in accordance with Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108), adjusted its beginning retained earnings for fiscal 2006 in the accompanying consolidated financial statements. See Note 11 for additional information on the adoption SAB 108.