Costco 2007 Annual Report Download - page 58

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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,
occasional direct mail marketing to prospective new members and direct mail marketing programs to
existing members promoting selected merchandise. Marketing and promotional costs are expensed as
incurred and are included in selling, general and administrative and preopening expenses in the
accompanying consolidated statements of income.
Preopening Expenses
Preopening expenses related to new warehouses, major remodels and expansions, new regional
offices and other startup operations are expensed as incurred.
Stock-Based Compensation
At the beginning of fiscal 2003, the Company adopted, on a prospective basis, Statement of Financial
Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123) and
all employee stock option grants made since the beginning of fiscal 2003 have been or will be
expensed ratably over the related vesting period based on the fair value at the date the options were
granted (however, see “Review of Stock Option Grant Practices” in Note 11, for a discussion of a
special committee review of historical grant practices).
The Company adopted SFAS 123R, “Share-Based Payment (as amended)” (SFAS 123R) at the
beginning of fiscal 2006, which requires companies to measure all employee stock-based
compensation awards using a fair value method and record such expense in its consolidated financial
statements. Had compensation costs for the Company’s stock-based compensation been determined
for awards made prior to fiscal 2003 under SFAS 123R, the Company’s net income and net income per
share would have been adjusted to the proforma amounts indicated below:
Fiscal 2005
Net income, as reported ............................................ $1,063,092
Add: Stock-based compensation expense included in reported net
income, net of related tax effects ............................... 43,344
Deduct: Total stock-based compensation expense determined under fair
value-based methods for all awards, net of related tax effects ....... (63,012)
Proforma net income .............................................. $1,043,424
Net Income per share:
Basic—as reported ............................................ $ 2.24
Basic—pro-forma ............................................. $ 2.20
Diluted—as reported ........................................... $ 2.18
Diluted—pro-forma ............................................ $ 2.12
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, including cash and cash equivalents,
receivables and accounts payable approximate fair value due to their short-term nature or variable
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