Costco 2010 Annual Report Download - page 54

Vendor Receivables and Allowances
Periodic payments from vendors in the form of volume rebates or other purchase discounts that are
evidenced by signed agreements are reflected in the carrying value of the inventory when earned or as
the Company progresses towards earning the rebate or discount and as a component of merchandise
costs as the merchandise is sold. Other consideration received from vendors is generally recorded as
a reduction of merchandise costs upon completion of contractual milestones, terms of the related
agreement, or by other systematic approach.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market, as determined primarily by the retail
inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S.
merchandise inventories. Merchandise inventories for all foreign operations are primarily valued by the
retail inventory method and are stated using the first-in, first-out (FIFO) method. The Company
believes the LIFO method more fairly presents the results of operations by more closely matching
current costs with current revenues. The Company records an adjustment each quarter, if necessary,
for the estimated effect of inflation or deflation, and these estimates are adjusted to actual results
determined at year-end.
At the end of 2008, due to overall net inflationary trends, merchandise inventories valued at LIFO were
lower than the FIFO value, resulting in a $32 charge to merchandise costs. During 2009, due to overall
net deflationary trends, the Company recorded a $32 benefit to merchandise costs to adjust inventories
valued at LIFO. At the end of 2010 and 2009, merchandise inventories valued at LIFO approximated
FIFO after considering the lower of cost or market principle.
2010 2009
Merchandise inventories consist of:
United States (primarily LIFO) ..................... $4,150 $4,080
Foreign (FIFO) ................................. 1,488 1,325
Total ...................................... $5,638 $5,405
The Company provides for estimated inventory losses between physical inventory counts as a
percentage of net sales, using estimates based on the Company’s experience. The provision is
adjusted periodically to reflect the results of the actual physical inventory counts, which generally occur
in the second and fourth fiscal quarters of the fiscal year. Inventory cost, where appropriate, is reduced
by estimates of vendor rebates when earned or as the Company progresses towards earning those
rebates, provided that they are probable and reasonably estimable.
Property and Equipment
Property and equipment are stated at cost. In general, new building additions are separated into
components, each with its own estimated useful life. Depreciation and amortization expense is
computed using the straight-line method over estimated useful lives or the lease term, if shorter.
Leasehold improvements incurred after the beginning of the initial lease term are depreciated over the
shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any
renewals that are reasonably assured at the date the leasehold improvement is made.
Estimated useful lives for financial reporting purposes are as follows:
Years
Buildings and improvements ....................................... 5-50
Equipment and fixtures ........................................... 3-20
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