Costco 2003 Annual Report Download - page 34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
Revenue Recognition
The Company recognizes sales, net of estimated returns, at the time the member takes possession of mer-
chandise or receives services. When the Company collects payment from customers prior to the transfer of
ownership of merchandise or the performance of services, the amount received is recorded as deferred revenue.
The Company provides for estimated sales returns based on historical returns levels. The reserve for sales returns
(sales returns net of cost of goods sold) was $4,869 and $3,507 at August 31, 2003 and September 1, 2002, re-
spectively.
Membership fee revenue represents annual membership fees paid by substantially all of the Company’s
members. The Company accounts for membership fee revenue on a “deferred basis,” whereby membership fee
revenue is recognized ratably over the one-year life of the membership. The Company’s Executive members
qualify for a 2% reward (which can be redeemed at Costco warehouses), up to a maximum of $500 per year, on
all qualified purchases made at Costco. The Company accounts for this 2% reward as a reduction in sales, with
the related liability being classified within other current liabilities. The sales reduction and corresponding li-
ability are computed after giving effect to the estimated impact of non-redemptions based on historical data. The
reduction in sales for the fiscal years ended August 31, 2003, September 1, 2002 and September 2, 2001, and the
related liability as of those dates were as follows:
Fiscal Year Ended
August 31,
2003
September 1,
2002
September 2,
2001
Two-percent reward sales reduction ....................... $169,612 $143,637 $84,243
Two-percent unredeemed reward liability .................. $114,681 $ 94,448 $57,840
Merchandise Costs
Merchandise costs consist of the purchase price of inventory sold, inbound shipping charges and all costs
related to our depot operations, including freight from depots to selling warehouses. Merchandise costs also in-
clude salaries, benefits, depreciation on production equipment, and other related expenses incurred in certain
fresh foods and ancillary departments.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits and workers’ compensa-
tion costs for warehouse employees, other than fresh foods and certain ancillary businesses, as well as all
regional and home office employees, including buying personnel. Selling, general and administrative expenses
also include utilities, bank charges and substantially all building and equipment depreciation, as well as other
operating costs incurred to support warehouse operations.
Marketing and Promotional Expenses
Costco’s policy is generally to limit marketing and promotional expenses to new warehouse openings, occa-
sional direct mail marketing to prospective new members and annual direct mail marketing programs to existing
members promoting selected merchandise. Marketing and promotional costs are expensed as incurred.
Preopening Expenses
Preopening expenses related to new warehouses, major remodels/expansions, regional offices and other
startup operations are expensed as incurred.
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