Costco 2006 Annual Report Download - page 47

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The Company provides for estimated inventory losses between physical inventory counts as a
percentage of net sales. The provision is adjusted periodically to reflect the actual physical inventory
count results, 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 they are probable and reasonably
estimable. Other consideration received from vendors is generally recorded as a reduction of
merchandise costs upon completion of contractual milestones, terms of agreement, or other systematic
and rational approach.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization expenses are computed
using the straight-line method for financial reporting purposes. Estimated useful lives by major asset
category are as follows:
Years
Buildings ......................................... 5-50
Equipment and fixtures ............................. 3-10
Leasehold improvements ............................ Shorter of useful life or
lease term
Software acquisition and development ................. 3-6
Interest costs incurred on property during the construction period are capitalized. The amount of
interest costs capitalized was $12,681 in fiscal 2006, $7,226 in fiscal 2005, and $4,155 in fiscal 2004.
Impairment of Long-Lived Assets
The Company periodically evaluates long-lived assets for impairment when management makes the
decision to relocate or close a warehouse or when events or changes in circumstances occur that may
indicate the carrying amount of the asset may not be fully recoverable. The Company evaluates the
carrying value of the asset by comparing the estimated future undiscounted cash flows generated from
the use of the asset and its eventual disposition with the asset’s reported net carrying value. The
Company recorded pre-tax, non-cash charge of $3,893 in fiscal 2005 reflecting its estimate of
impairment relating to real property. The charge reflects the difference between the carrying value and
fair value, which was based on estimated market valuations for those assets whose carrying value is
not currently anticipated to be recoverable through future cash flows.
Goodwill
Goodwill resulting from certain business combinations is included in other assets, and totaled $72,953
at September 3, 2006 and $71,848 at August 28, 2005. The Company reviews previously reported
goodwill for impairment on an annual basis, or more frequently if circumstances dictate. No impairment
of goodwill has been incurred to date.
Accounts Payable
The Company’s banking system provides for the daily replenishment of major bank accounts as
checks are presented. Accordingly, included in accounts payable at September 3, 2006 and August 28,
2005 are $564,754 and $527,920, respectively, representing the excess of outstanding checks over
cash on deposit at the banks on which the checks were drawn.
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