5-2 Final Project Milestone Two- Analysis of Financial Statements

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Apr 3, 2024

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1 Milestone 2 5-2 Final Project Milestone Two: Analysis of Financial Statements Sherry Gerges Southern New Hampshire University ACC 610: Financial Reporting 1 Professor: Dr. Stephen Weiss January 14 th , 2024

2 Milestone 2 In this paper, we will discuss the changes in the financial ratios of Costco in the past few years. We will also look at the changes in the financial reports regarding cash and the accounts receivable account balance. We will also touch base on the type of inventory valuation method that Costco uses and explain why it uses this method and what the benefits are. Lastly, we will predict how Costco will perform in the following year compared to its competitors. Financial Ratios From 2019 to 2023, Costco’s net earnings per share increased significantly. In 2019, their EPS was $8.26 and as of 2023, it went up to $14.16, which is a $5.90 increase (Costco EPS - Earnings per Share 2010-2023 | COST, n.d.). This indicated a growth in profitability for each share of stock. On the other hand, their gross margin from 2019 was 13.05% and in 2023 it was 12.37% (Costco EPS - Earnings per Share 2010-2023 | COST, n.d.). This decrease implies that there may have been a change in the costs of sales for Costco. Cash Based on the cash flow statements I have analyzed we can see that there has been an increase in Costco’s net cash flow throughout the years. In 2019, Costco had a net cash flow of $2,329 million and in 2023 they have $3,497 million in cash flow (Costco EPS - Earnings per Share 2010-2023 | COST, n.d.). This shows that they have been able to increase their cash flow through the years which suggests that liquid assets have increased. This means that the company is thriving and based on these trends we can see that Costco will continue to succeed. Account Balance Although Costco hit one of the lowest amounts in their 2019 accounts receivable, $1.535 billion, Costco hit one of their highest amounts in 2023, $2.542 billion (The Complete Toolbox

3 Milestone 2 for Investors | Finbox.com, n.d.). This increase indicates that more people used credit to pay for their goods which could negatively impact the cash flow for the company. Valuation Method Costco uses the just-in-time (JIT) inventory valuation method “which minimizes excess inventory and reduces carrying costs. JIT allows the company to keep inventory levels low while maintaining high product availability” (Haghdadeh, 2023). With this method, Costco can see what the sales trends are and adjust their inventory, accordingly, allowing for the inventory to arrive just in time for the demand of the customers. There are a few benefits to using this method for Costco including reducing warehouse space requirements, lowering holding costs, and minimizing the risk of inventory uselessness (Haghdadeh, 2023). Also, by using the just-in-time inventory valuation method, Costco can “respond quickly to changing market demands and optimize its inventory turnover rate” (Haghdadeh, 2023). All of this is important to be able to meet the demands of the customers as well as keep the company moving in the right direction. Predict Based on the industry trends, plans of Costco, and the information I have gathered, I believe there is a bright future ahead for Costco. Costco has been booming in sales compared to its competitors because of the prices they offer to its customers as well as the many services available to them. This year, 2024, we will continue to see an increase in their cash flow, just as there has been from 2019-2023. The financial statements that I reviewed, shows that the just-in- time inventory valuation method is the best method for Costco to be using for the market they are working with.

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4 Milestone 2 References Costco EPS - Earnings per share 2010-2023 | COST . (n.d.). MacroTrends. https://www.macrotrends.net/stocks/charts/COST/costco/eps-earnings-per- share-diluted#:~:text=Costco%202023%20annual%20EPS%20was,a %2024.94%25%20increase%20from%202020 . Haghdadeh, P. (2023, October 11). Costco Supply Chain: Efficiency, and Sustainability 2023. DFreight . https://dfreight.org/blog/costco-supply-chain-efficiency-sustainability/ #:~:text=reducing%20lead%20times.-,Just%2Din%2DTime%20Inventory %20Management,while%20maintaining%20high%20product%20availability. The complete toolbox for investors | Finbox.com . (n.d.). https://finbox.com/NASDAQGS:COST/explorer/ar/#:~:text=Costco %20Wholesale%27s%20accounts%20receivable%2C%20net%20decreased%20in %202019%20(1.535%20billion,2.285%20billion%2C%20%2B2.0%25).