Costco 2002 Annual Report Download - page 29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
Vendor Rebates and Allowances
Periodic payments from vendors in the form of buy downs, volume or other purchase discounts that are evi-
denced by signed agreements are reflected in the carrying value of the inventory when earned and as a compo-
nent of cost of sales as the merchandise is sold. Up-front consideration received from vendors linked to purchases
or other commitments is initially deferred and amortized ratably over the life of the contract or as performance of
the activities specified by the vendor to earn the fee is completed.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market as determined primarily by the retail in-
ventory 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 method of ac-
counting, 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
LIFO inventory adjustment for the fourth quarter of fiscal 2002 increased gross margin by approximately
$21,000 as compared to $2,000 in the fourth quarter of fiscal 2001. If all merchandise inventories had been val-
ued using the first-in, first-out (FIFO) method, inventories would have been higher by $150 at September 1, 2002
and $13,650 at September 2, 2001.
September 1,
2002
September 2,
2001
Merchandise inventories consist of:
United States (primarily LIFO) .......................... $2,552,820 $2,244,986
Foreign (FIFO) ...................................... 574,401 493,518
Total ............................................ $3,127,221 $2,738,504
The Company provides for estimated inventory losses between physical inventory counts on the basis of a
standard percentage of sales. This provision is adjusted periodically to reflect the actual shrinkage results of the
physical inventory counts, which generally occur in the second and fourth quarters of the Company’s fiscal year.
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 and accelerated methods for tax purposes. Buildings are
depreciated over twenty-five to thirty-five years; equipment and fixtures are depreciated over three to ten years;
and leasehold improvements are amortized over the initial term of the lease.
Interest costs incurred on property and equipment during the construction period are capitalized. The
amount of interest costs capitalized was $13,480 in fiscal 2002, $19,157 in fiscal 2001, and $10,919 in fiscal
2000.
Impairment of Long-Lived Assets
The Company periodically evaluates the realizability of long-lived assets for impairment when events or
changes in circumstances occur, which may indicate the carrying amount of the asset may not be recoverable.
The Company evaluates the carrying value of the asset by comparing the estimated future cash flows generated
from the use of the asset and its eventual disposition with the asset’s reported net book value. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, the Company recorded no pretax, non-cash
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