Category: Costco

Costco Wholesale Corporation: Analytical Essay on Financial Management and Markets

Introduction

Costco is among largest wholesale Corporations in the world right after Walmart. It has 760 warehouses, which make it largest wholesale club operator. What make them even larger is the fact that they have wide variety of merchandise and services. Some services include Food Service, Optical, Travel, Auto Program, Photo, even Online Shopping, which makes Costco extremely convenient place for its club members.

As a club-oriented company, Costco has around 100 million members in 11 countries, 44 US states and Puerto Rico. One of the advantages that the members receive is discounts on their merchandise. They sell their products in bulks, so it is very convenient for residential and commercial customers.

Costco follows very simple business strategy in order to provide discounts to its members. They do not carry same or similar items from different manufacturers or brands. They focus on a single brand for particular item/s. This way sales of those particular items increase, which gives them a position to negotiate better deals and prices from the manufacturers. For their high product flow manufacturers are more likely to offer and give good deals. It works in everyone’s favor, consumers, manufacturers and Costco itself.

In, now, distant 1983 the first Costco was open by J. Sinegal and H. Brotman. More precisely it was September 15 1983. It did not take them too long to make it a public company, it happened on December 1 1985.

Due to large membership, Costco’s annual membership fee account for 80 percent of Costco’s gross margin and 70 percent of its operating income. Costco’s membership cost $60 annually for Gold membership and $120 annually for executive plans with extra benefits. Costco has 8% to 10% markup on brand and around 15% on house brand like Kirkland Signature. According to the company’s 2018 results, it sold $138 billion in merchandise. The products they sold cost them $123 billion, leaving $15 billion for the business. All expenses combined totaled nearly $14 billion. Therefore, sales of $138 billion, cost of goods sold of $123 billion, and selling, general, and administrative costs of $14 billion.

Corporate governance

Costco’ model is a big wholesale warehouse business. The corporate governance of Costco has to be associated with the type of business Costco does and its locations in the North America and rest of World. Overall, corporate governance of Costco is doing very good job. However, I believe that there are some problems that could be handled or resolved differently in order to accomplish the healthier results.

CEOs run business, but the board of directors have the ultimate authority.

Whenever they have meetings each board of director need to appear at those meetings. However, if some of them cannot be present at the meeting they must contact a chairman to let them know. I believe that this is how it should be.

The board of directors choose one of the members as the chairman. Although, they can impeach the chairman. Therefore, the chairman does his/her job with constant fear of losing his/her position. This cannot be very productive and proactive. To me this whole practice seems like it is very easy to manipulate and fabricate what one person or group of people wants based on their interests. One person could affect others to make decisions by using their fears. This does not sound like a very healthy environment.

Costco has this policy that director does not receive additional compensation. They get paid for what they do, but no additional salary. I believe that is fair because being a director is already compensated enough.

There is annual meeting with shareholders. This is something that the directors encourage, but not require. If I am a shareholder I would like this meeting to be required in order to learn how the many is handled, unless there are different ways to stay informed.

Lack of meetings and sharing information and ideas is never good. For this reason they should have at least two annual visits.

The bigger family is harder is to manage. So Costco being such a big company their governance could be improved. The global market is changing fast, and businesses need to adapt accordingly. The policies have to be reviewed every year based on location.

SWOT Analysis

Strength: Costco’s biggest strength is in the big packages for less money offered to its customers. This strategy attracts regular people as well as business. They keep prices lover then the direct competitors such as Walmart or Sam’s Club. The better deals bring more memberships, which is their main way of making profit (80% of their profit comes from memberships). Customers find that Costco deals really saves them money, because of this 90% members renew their memberships.

Also, Costco carry very few brands for the same or similar products. This gives them advantage to sell large amounts from the same brand. For this reason Costco is able to get those products for less from its suppliers. Lower cost reflects on lower prices on the product they sell.

Another Costco’s strength is the fact that they minimized their operation cost by using roofs that allow natural light to save on the electric bills. Another way to save money, Costco’s products come in the crates, which are placed on the sales floor. This strategy avoids time spent on stocking the products and hourly wages for stock people. These strategies reduces their costs and allows them to sell for less. Lower prices do not require a lot of advertisement, therefore Costco is not in need of unnecessary fliers and papers.

Huge part of Costco’s strength is their ability to keep their employees. With lower prices and high sales volume they are able to pay their employees more than their competitors. In addition, they offer good benefits and 401 K, which increases the employees loyalty. More experiences work force increase productivity and customer services. Also, reduces the cost of training the new employees.

Weakness: Every business has a weakness so is Costco. Sometimes a strength can be a weakness at the same time. Costco does not carry too many brands for the same product, which plays its advantages as we discussed earlier. However, this can be an disadvantage because sometimes customer wants to have many choices as Costco’s competitors. The same brans could bore customers and push them away for period of time or certain products.

Another point where Costco could improve is the fact that the most of their revenue comes from US and Canada. Therefore, Costco almost entirely depends on to markets, even though there are vastly larger markets in Europe and Asia. If anyone comes in with similar or better business idea Costco would be shaken and forced to change and adapt.

Although, Costco is doing great, they could do even better if they aim at customers from different age groups. Mostly, families and older generation are members, so Costco needs to attract younger populations as well. Younger population tends to spend more money, but they do not need bulks of everything if they live alone or in smaller households. Perhaps, there should be an option to by smaller amount for less price as well.

Opportunity: With the new age and technologies there are always opportunities to make business better. Selling the products online could be one of the things that Costco could make available for its customers. Perhaps this would be one way to attract younger people.

Another way to attract younger groups is to include variety of clothing, technology. Nowadays it is visible that Costco has done something towards that, but younger generations need more. Easier and faster checkouts, such as digital wallets using phones. Being opent to more advanced technologies would appeal younger people who might think that Costco is not cool enough place for them to shop.

As mentioned above, Costco should expand their business outside North American Continent. Imagine amount of revenue if they expend into India and/or China. Those countries have large number of population that are in need of place like this.

Threat: Online shopping is a great opportunity for Costco to improve their business, but it also can be a threat. It would be very difficult to compete with Amazon and/or ebay. Costco would have to spend more resources to become and remain competitive with others.

Costco runs their business on low prices and less costly operation in order to keep slightly higher wages for its employees. However, minimum wages being on the rise could affect Costco’s business model.

Another threat to Costco could be the volume of memberships. Other places also trying to improve their ways of attracting and keeping customers. Costco’s new memberships and renewal memberships could be affected by the Walmart, Target, Sam’s club if they give better customer service and lower prices.

Ratio Analysis

Short Term Solvency: When it comes to solvency Costco has ability to meet their long-term debts and financial obligations. The current, quick and cash ratio went up during the last three years.

Also, current assets increased much above current liabilities. The current ratio has increased due to huge rise in merchandise inventory and cash. Due to incline in cash comparing to increase in current liabilities the cash ratio has gone up during last 3 years. Therefore, meeting the current obligations should not be an issue. However, quick ratio has not change much between 2017 and 2018 as well as account payable.

Likewise, from 2016 to 2017, company has seen greater growth in current liabilities than increase in cash and quick ratio was nearly the same in both years. Therefore they relied too much on the inventory.

In recent years, 2006-2018, the cash has been increased as a result of increase in cash and cash equivalents. However, because of the increase account payable the total liabilities have increased resulting cash ratio not to change. They are not able to pay debts, which results in accounts payable to increase. This trend has been stretched from 2016 until 2018.

Long Term Solvency: Costco’s Total Debt ratio has declined in 2018 and total assets has increased further than increase in total liabilities. They have not paid its long-term debts, which accumulated even more debts in 2019 . Total assets increase comes mostly from the increase in “cash and cash equivalents and increase in inventory. The assets increase comes from the decrease in debt ratio in 2017, which directs that they will be able to meet the long term liquidity. They also have increase in the debt ratio because of increase in long term debts comparable to increase in assets. This happened because they had bought more assets with debt during 2017 then prior year. Based on debt ratio, they would still be alright even if interest rate goes up, of course not too much higher.

If creditors invest more than investors it affects debt equity ratio to increase, and that is what happened with Costco last year. That is not very healthy way to do business.

Total retained earnings have increased in 2018, but not much increase in total liabilities. It is clear that more money is borrowed from banks that creditors because debt-equity ratio is higher. This means larger interest rate. The debt-equity ratio has went up in 2016/17, which might tell us that more money has been loaned from creditors to purchase assets and inventory. This is potential risk to creditors.

Based on equity multiplier being close to 3 during 2018 tells us that asses are manly supported by taking more credit (debt) rather than by its shareholders. So, it make sense that their debt has increased in recent years. Although, the equity multiplies has been slowly decreasing because they are paying of some of the debts. However, in last few years, (2016-2018) they have increased their assets by getting deeper in debt rather than by investors funding. In 2017 Costco has taken a huge loan which greatly affected the equity multiplies (increased).

It is good that their times interest earned ratio in 2018 was 28.17. They were able to meet their obligations due to greater earnings then obligations. As long as they keep earning above interest obligations they are ok.

Assets Utilization Ratio: Since Costco is a warehouse wholesale type of business they depend (current ratio) on their inventory. Last year they had 32 days of day’s sales in inventory. Last couple years their inventory stayed longer. This is probably because of the inventory remained from the previous year (2016-2017) or they calculated that there are going to be more sales so they stocked up.

During 2018 Costco day’s sale in receivable was 4 days. Therefore, they would receive money from their operation within the 4 day of transaction. This stays very similar for them ever since 2016. This is important for the future projection because it mean that their members mostly having a positive credit score.

Because Costco is receiving money from the members in such short time they have not much problem to pay their accounts payable. However, they are still slightly behind. Their days payable outstanding is 33 in 2018. Therefore they are about a month behind, which reflects on payable account to increase in last two years.

Based on total assets turnover (3.4) the total revenue is greater than total assets. Their asset ratio is greater than 1 because they are producing revenue. As long as they keep the asset ratio above 1 that will show efficiency in using assets.

Profitability Ratio: For 2018, profit margin ratio was 0.02 and for 2016 and 2017 only 0.01, therefore profit was 2% and 1% respectively because of increase in total revenue. During this time the cost and net income remained almost unchanged.

According to the return on assets being below one in 2018, we can conclude that they should do a better job converting assets to profit. During this year they purchased more inventory resulting in the assets value to go up. However, the net income stayed nearly the same (did not go up as much) affecting the ratio being below one. Very similar scenario for all three years (2016-2018). They definitely need to do better job converting assets into profit.

The return on equity ratio need to be high in order to show that you are using shareholders money to make money. The higher return on the investment is better for the shareholders. Costco made 24 cents on each dollar in 2018, or the ratio was nearly 24%. Looking at 2017 and 2018 the ratio change is insignificant. In 2018 the net income is higher while equity did not go up much. In 2016 both equity and income were low. Because the income was low the ratio went down.

Market Value Ratio: Price-earnings ratio specifies the probable price of the share based on its earnings. It is a compass for investors to make a decision how much they would pay for the share in future. They want to see this ratio to be high. The market price for the share has increased almost 50% during 2018. Comparing the market prices between 2016-2017 and 2017-2018 we see that there is a great difference. Therefore, the basic price went up, but not share price, which cause the ratio to go down.

References

1. Costco wholesale, (1998-2019) Investor Relations retrieved November 17, 2019 from https://investor.costco.com/shareholder-services/investor-fags
2. Iason Dalavagas, (Feb 9, 2015) SWOT Analysis: Costco Wholesale Corporation retrieved November 17, 2019 http://www.valueline.com/Stocks/Highlights/SWOT_Analysis__Costco_Wholesale_Corporation.aspx#.XTTxD4WcHg8
3. Hitesh Bhasin (Jan 9, 2019) SWOT Analysis of Costco retrieved November 17, 2019 from https://www.marketing91.com/swot-analysis-costco/
4. Ross, Stephen (2016) Corporate Finance Eleventh Edition. McGraw Hill Education
5. Steven Nickolas, (Dec 12, 2018) What If You Had Invested Right After Costco’s IPO? November 17, 2019 from https://www.investopedia.com/articles/markets/120115/if-you-had-invested-right-after-costcos-ipo.asp
6. Daniel Kissinger (Feb 6, 2017) Costco Wholesale SWOT Analysis retrieved November 17, 2019 from http://panmore.com/costco-wholesale-swot-analysis

Analysis of Key Macroeconomic Variables Affecting Costs, Demand, Business Environment of Costco Wholesale

Costco Wholesale can be affected economically through many factors such as, unemployment rate, inflation, consumer debt levels, foreign-currency exchange rates, healthcare costs, reduced consumer confidence, and other economic factors could harmfully affect demand for Costco’s products and services. Prices of certain commodity products, including gasoline and other food products, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, as well as labor costs (Costco Annual Report, 2018).

Figure 1: GDP Value of USA (Trading Economics, 2019)

The United States economy increased by an annualized 2.1% in the third quarter of 2019, compared to an advance estimate of 1.9% and following a 2.0 percent growth in the prior three month period. GDP Growth Rate in USA averaged 3.21% from 1947 until 2019, achieving an all-time high of 16.70% in the beginning of 1950 and a record low of -10% in the first quarter of 1958. With an increasing GDP, it indicates that the economy is growing. This can also be an indicator that consumer spending is increasing, which will then lead to a rise in demand for Costco Wholesale and the retail industry.

Figure 2: Unemployment Rate in USA (Trading Economics, 2019)

Unemployment rate in the US rose to 3.6% in Oct 2019 from 3.5% in the prior month and in line with market expectations. Over the month, the amount of unemployed individuals rose by 86,000. The labor force participation rate went up to 63.3% from 63.2% in the month of September. Unemployment Rate in the US averaged 5.74% from 1948 until 2019, reaching an all time high of 10.80% in November of 1982. As the unemployment rate in the US decreases, Costco shoppers can purchase more consumer goods. However, due to the nature of consumer staples, we believe the unemployment rate has little to no effect on the outcome of the overall industry (Danahoe and Pedersen, 2018). If consumer wages are decreasing and unemployment is rising, consumers will opt to buy cheaper and lower margin products (Eklin and Zecchin, 2018).[image: ]

Figure 3: Inflation Rate in the US (Trading Economics, 2019)

Annual inflation rate in USA rose to 1.8% in Oct 2019 from 1.7% in September and above market expectations of 1.7%. The food index grew 2.1% over the last year, whilst the energy index dropped 4.2% over the last year even though rising in October. Consumer prices rose 0.4% on a monthly basis, higher than a flat reading in September and forecasts of 0.3%. Although overall demand for food is not expected to fluctuate outrageously. Costco Wholesale Corp. is still seeing strong demand for its merchandise but is dealing with broad inflation for products ranging from dog food to plastic cups (Talley, 2011). With rising inflation, Costco may be affected due to prices for goods and services becoming more costly and the value of money in consumers’ pockets reduces. However, a slightly lower rate will benefit the consumer staples sector to continue to grow because it gives customers more encouragement to buy products.

Figure 4: USA Balance of Trade (Trading Economics, 2019)

The United States trade deficit reduced to $52.5 billion in the month of September from $55 billion in the prior month, reaching market expectations. It’s been the lowest trade gap since April as imports from China and Germany declined and the United States stated first petroleum surplus since 1978. Exports dropped 0.9% led by soybeans and automobiles, while imports dropped 1.7% due to purchases of cell phones, toys, sporting gear, semiconductors and vehicles. Balance of Trade in the US averaged $-15029.11 million from 1950 until 2019, reaching a record high of $1946 million in June of 1975 and an all-time low of $-67823 million in August of 2006. Costco said prices will rise due to the trade war between China and the U.S. and the tariffs imposed on Chinese goods (Joyce, 2019). The trade war escalated earlier this month after the Trump administration increased tariffs on $200 billion worth of Chinese goods to 25% from 10% (Joyce, 2019). Costco is doing as much as it can to speed up the shipment of items before a few tariffs went into effect, but It was not immediately obvious how the tariffs would influence prices on imports from China.

Costco Wholesale announced its operating results for the third quarter and the first 36 weeks of fiscal 2019, ended May 12, 2019. Net sales for the quarter grew 7.4%, to $33.96 billion, from $31.62 billion last year. Net sales for the first 36 weeks increased 8.3%, to $102.90 billion, from $95.02 billion last year.

Fast and major changes in commodity prices and Costco’s ability and desire to pass them through to their members may possibly affect their sales and profit margins. These economic factors might also increase Costco’s merchandise costs and selling, general and administrative expenses, and otherwise negatively affect Costco Wholesale’s operations and financial results.

Government Business Policies:

Many Government policies can affect Costco or any other business negatively and even positively. Government policies affect interest rates, a rise in which increases the cost of borrowing in the business community. Greater rates also lead to reduced consumer spending which then leads to a decrease in demand for Costco products. On the other hand, Reduced interest rates entice investment as businesses increase production. Therefore, consumer demand for Costco’s products will rise.

Trade Policies:

Costco updated the risk factors section of its most recent annual reports to add a warning that import taxes are a risk to its business success. The trade war between the US and China intensified after the Trump administration increased tariffs on $200 billion worth of Chinese products from 10% to 25%. Costco said prices will rise due to the trade war between the U.S. and China and the tariffs enforced on Chinese goods. Costco’s business model relies on selling a few products in a broad range of categories, all at a low-low price (Kelleher, 2019). Costco Wholesale operates membership warehouses based on the model that offers their customers low prices on a limited selection of nationally branded and private-label products in a broad range of categories that produce high sales volumes and fast inventory turnover. Which will then, enable Costco to operate profitably at much lower gross margins than most other retailers. Costco Wholesale generally sells inventory before they are even required to pay for it.

Effects of Environmental regulations:

Vital changes in state, federal, and international environmental laws and regulations related to the discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental issues may negatively impact Costco Wholesale’s financial status and results of operations. If Costco fails to obey these laws then the result could harm their customers and employees, weighty costs to please environmental compliance, or harsh penalties and restrictions on operations by government agencies that possibly will unfavorably affect Costco’s business, financial condition and results of operations.

Potential Risks in Foreign/ Domestic Market:

Economic Risks:

General economic factors, foreign and domestic, may unfavorably affect Costco’s business and outcomes of operations. Levels of unemployment, inflation, gasoline costs, higher energy, consumer debt levels, uncertainties linked to government fiscal and tax policies, foreign exchange rates, and other economic factors could negatively affect operations and demand for Costco’s products and services. Prices of some commodity products, including gasoline and other food products, are volatile and subject to fluctuations happening from changes in international and domestic supply and demand, and labor costs. These factors could also raise Costco’s merchandising costs, general and administrative expenses, and if not unfavorably affect Costco’s financial results and operations.

Political Risks:

In 2017, Costco operated 227 warehouses in 10 countries outside of the United States of America. Costco’s operations globally could be negatively influenced by a range of factors, many of them like those Costco challenges in the U.S. Some factors contain political, governing limitations, and policy changes such as the U.K.’s vote to withdraw from the European Union. All these factors play a role in Costco and can be a threat to its operations in foreign or domestic markets. The government policies of the U.S. and international governments, and risks linked with having major warehouses located in countries which have been known to be less stable than the U.S. may have a huge impact on Costco Wholesale financially and threat towards its operations worldwide. Risks in Costco’s foreign operations also consist of the costs and complexities of managing international operations, unfavorable tax consequences, and greater difficulty in implementing property rights.

Financial Risks:

Costco’s financial and operational performance is very much dependent on the U.S. and Canadian operations. In 2017, 85% and 87% compromised operating income and net sales, respectively. Within the U.S., Costco is very well dependent on their California operations, which generated 30% of U.S. net sales in 2017. The market in California, has a bigger percentage of greater volume warehouses as compared to Costco’s other domestic markets. Any significant slowing or decline in those operations could greatly negatively affect Costco Wholesale’s financial results. The economy in California is booming as of now as the population spears higher and companies bring resources into California. Costco has done a terrific job at gaining sales profits from that growth, but the downside to that success is that Costco could be harmed if California’s economic growth stumbles.

The Analysis of Costco’s Business Strategy and Its Main Limitations

The objective of this paper is to explore the possibilities of a company with a strong corporate culture like Costco’s to survive in the face of the rapidly increasing globalization using its current business approach. On the off chance that an organization follows a globalization approach, product design and promotional approaches are universally planned. This system depends on the supposition that there is a solitary worldwide interest for some shoppers and modern items. The hypothesis is that individuals wherever need to buy similar products and act in a similar way (Daft, 2017, p. 270).

The company’s dedication to its employees and customers, rapid and positive response to complaints and its devotion to societal development is a model worthy of emulation. This case will avail managers a better understanding of the complexities of business in a global environment and how to maximize profit. Another unique take from this case is the planning and strategy formulation that would make organizations stand out from their competitors.

Analysis

In spite of the many advances Costco made to put the company in a decent position, it faces a host of challenges ranging from non-disclosure of management job opportunities to prospective applicants. The company may have valid reasons for not doing so, but the public may start thinking that the lack of notification for such openings was to allow the company bring in their preferred candidates regardless of their experience or qualification. Costco is also faced with the issue of an unfair working environment for people of color, women, and people in the minority from reaching top management positions in the company. In a bit to quell these suspicions, Costco took its job postings online for people to see. Also, the recruitment process at Costco is now fully computerized which I believe is a bid to limit human involvement in the recruitment process, so they don’t exploit the process for their selfish gain.

Costco also grappled with a problem of global mindset when it showed no consideration for the culture of the Mexican people when it proposed to build a parking lot on land which housed a Casino that was in a state of disrepair in Cuernavaca, Mexico. The disputed land had historical importance and cultural significance to the people of Cuernavaca (Daft, 2017, p. 261). A global mindset is a blend of tolerance and responsiveness to cultural and business differences with a desire to incorporate diversity across the globe. Global learning is an ever-developing and evolving process based on cognitive feedback mechanisms that facilitate the quest for knowledge that extends and refines human mental structures (Lovvorn & Chen, 2011, p. 276).

Also given that must multinational spend huge sums of money on promotions and advertising to attract prospective customers, and penetrate new markets, the situation at Costco is entirely different. Sinegal who was the founder of Costco told an ABC News interviewer that the company invests little or no resources towards promotions, that over 100 thousand willing employees promote the company to its friends and neighbors. No doubt the employee efforts towards advertising the company has brought good fortune to the company in contrast to its competitors like Amazon and Walmart, but could Costco do more by budgeting money to have advertising companies run its promotions? That remains to be seen.

Integration

Every business needs a working strategy. These strategies include sales strategy, marketing strategy, human resource management strategy, etc. For Costco, the rapid growth of the company can be attributed to an overall effective management strategy. The specification in strategic planning is necessary for departments to narrow down their objectives, control and manage risks, encourage and encourage the company to adopt a marketing strategy

Unarguably, word-of-mouth is the oldest and most common means of advertising. With over 140000 employees around the state, Costco is the perfect example of a brand that sells itself. Backed by its good customer relations and enthusiastic employees, the CEO has every reason to brag. Currently, the organization has no current marketing strategy. A marketing strategy will not only enable them to stay abreast of current trends in the business world, but it will also help them gain and maintain a competitive advantage in any economy. Shoppers are more interested in online transactions. Costco can increase customer base by creating awareness both online and offline.

It may seem admirable that employees created a Costco emergency brigade but putting the lives of employees at risk irrespective of how reasonable it may have been at the time it is as a result of negligence. Apparently, Costco is in need of a Risk Management strategy. Risk management is the probability of inconsistencies that can cause harm. Risk is an occurrence that varies from what is planned, but this variance is only apparent if it results in a loss (Kasidi, 2010). The strategy Costco should adopt is one that will put a team in place to manage emergencies of that nature. Considering that they have goods inside the warehouse, an emergency team should be on and around the location in case of any fire outbreak or disaster.

Conclusion

Costco’s business strategy of zero financial commitment to adverts and promotions and money saved from that channeled into decent employee wage bill and low prices for its merchandise has seen the company go head to head with other heavyweights in the industry.

Planning is an essential tool in any management process. A plan can only be known as strategic if it targets the goals of the organization whether short term or long-term goals. Planning pays attention to details. It manipulates to a great advantage all the factors that are responsible for achieving organizational goals. One major factor managers consider while planning is the effect their plan may have on the overall performance of the staff. Careful planning helps to reduce the risk of failure. Take for example the Costco situation, they could have lost employees as a result of negligence because they failed to plan ahead and prepare adequately for such an emergency. A good plan takes all angles into account.

My key takes from this case is that going forward, I will incorporate effective planning and risk management strategies to preempt the incidence of mishaps in any organization I find myself. Also, in spite of the successes that Costco recorded with its staff being the only people that promoted the business, I still believe the company stands to benefit from an all-out advert campaign that will promote its business to people that its staff cannot reach. Marketing is integral even though it comes a huge cost. Companies would make up for the money spent.

References

1. Daft, R. L. (2017). Management (13th ed.). Boston, MA: Cengage Learning.
2. DeRosa, D. M., & Lepsinger, R. (2010). Virtual team success: A practical guide for working and leading from a distance. San Francisco, CA: Jossey-Bass.
3. Kasidi. (2010). Risk Management. Jakarta: Ghalia Indonesia.
4. Lovvorn, S., & Chen, J.-S. (2011). Developing a Global Mindset: The Relationship between an International Assignment and Cultural Intelligence. International Journal of Business and Social Science, 276.

Analysis of Costco Wholesale Corporation’s Organizational Structure

Costco Wholesale Corporation’s organizational structure is based on the company’s current operations and its markets in the United States. Costco’s strategy is based on low price level, ultra-low markups, and high-sales volume which makes customers believe they are saving money when they shop. By using this strategy Costco became the first company in the United States history that reached one billion dollar sales in less than six years. The company keeps growing with 785 stores and more than 98 million members. Costco’s management team looks at things from the viewpoint and perspective of its members; they assure their customers have a great buying experience and they assure their employees are happy and motivated.

First-line managers hold job titles such as: shift supervisor, department manager, store manager or crew leader. These managers are responsible for the daily management of line workers and are a crucial part of the company. At Costco these are the managers who oversee their stock employees, people who work with forklifts etc. Although they do not set goals for the corporation as a whole, they have a big influence on the particular store they are working at because they interact with the employees on a daily basis and can see who is doing their job correctly. First-line managers can contribute to organizational efficiency and effectiveness by directing their employees and by motivating them to accomplish tasks according to the plan.

Middle-level managers hold job titles such as: Regional Manager, Divisional Manager or General Manager. Middle-level managers on the other hand are responsible for accomplishing goals set by the top management. At Costco, these managers can contribute to organizational efficiency and effectiveness by motivating the first-line managers and also by preparing plans according to the company’s goals and vision. They are very important to the company because they can provide valuable information to top managers in order to help improve the workforce productivity.

Top-level managers hold job titles such as: CEO, CFO, COO, Vice President, Board President etc. Their main responsibility is the performance of the organization as a whole and setting direct goals that need to be achieved. Costco’s vision statement is: “a place where efficient buying and operating practices give members access to unmatched savings”. Costco’s mission statement is: “to continually provide our members with quality goods and services at the lowest possible prices’. Top-level managers at Costco can contribute to organizational efficiency and effectiveness by creating strategies to meet this mission and by keeping a good name for the company.

Organizational Culture is includes an organization’s expectations, experiences, philosophy as well as the values and the ways of interacting that contribute to the unique social and psychological environment of an organization. Organizational culture also includes the organization’s vision, norms, systems, symbols, language, assumptions, beliefs, and habits (Needle, 2004). Costco’s main characteristics of organizational culture are: common goal of excellence, positive attitude, high energy and fast pace, service orientation, and teamwork. Costco Wholesale’s organizational culture focuses on excellence in performance and they push their employees to further achieve high quality service in order to get customer satisfaction. Also, Costco helps their employees reach their personal career and educational goals, by even paying for part of their tuition. That is one of the reasons why in 2017, Forbes ranked them first on “America’s Best Large Employers”. Two things that have also contributed to Costco’s fantastic organizational culture are teamwork and positive attitude. The company believes that if a customer sees the employees getting along together and being friendly to one another, helps the company keep a good image in the market. Through teamwork, employees achieve flexibility that enables the company to address different variations in customer preferences.

Ethics affects every individual, from the business owners, customers, employees and even competitors. Having the proper ethic while running a business is crucial. The study and practice of ethics help us develop skills to articulate our own values and to evaluate the values of other people. Keeping the proper ethic is necessary in order to develop good relationships not only in business, but on a daily basis as well. Costco needs to satisfy the interests of their stakeholders, because they are the ones that determine the available capital for growth every year. The main interests of the stakeholders are business growth and profitability. In order for the company to be more profitable, they need to open up more stores nationwide or add more products to their product line. Considering they have strong competitors such as Sam’s Club, they always have to be on top of their game. Costco’s code of ethics conducts of these four main points: Obey the law, Take care of our members, Take care of our employees, and Respect our vendors.

The task environment is the set of forces that originate with global suppliers, distributers and customers that influence the managers. As a company expands more overseas, the task environment becomes more complex. Costco imports lots of their furniture and electronics from China. They need to keep a good relationship with the Chinese distributors in order for things to go smooth with the company. Costco has employees in China that go and look at the actual pieces of furniture or electronics, and decide what is best to sell in the American markets. Managers might face challenges because if there is high demand for a TV the company is selling in America, and they are out of stock in China, he needs to find a different solution or possibly even find a different distributor. The bigger the corporation the more complex this system is.

The general environment compromises wide-ranging global economic, demographic, political, sociocultural and technological forces that affect an organization. A manager needs to be aware of all of the following and they need to keep up with the latest news in order for the company to keep being successful. At times, this might be out of the manager’s hands but it is up to the manager to use and allocate its resources to find a solution if there is a problem in the first place. For example, if one state changes its tax rate, a manager should know then how to price its products. And if the company is losing money, a manager should know exactly what to do, whether is cutting hours for different employees or whether lowering the pay rate.

The Critical Evaluation of Costco’s Financial Statements

Costco Wholesale Corporation has performed well over the last five fiscal years (2015 through 2019). Net sales have increased by 30 per cent over the last 5 years. Comparable sales growth is accomplished by increasing the frequency of shopping from both new and existing members. Comparable sales growth is accomplished by increasing the frequency of shopping from both new and existing customers and the amount they spend on each visit to any of Costco’s outlet across the globe. The higher comparable sales exclusively of such products, the greater the leverage to sales. General and administrative expenditure, reducing it as a percentage of sales and improving profitability. Another important factor in growth of sales is the health of economies in which the business is carried out. Competition which is vigorous and persuasive also affects the sales growth and gross margins. A wide range of global and regional wholesalers and distributors including those with e-commerce operations, are also impacted with intense and widespread business rivalry.

The financial performance of the company primarily depends on the ability to control cost. With respect to cost related to employee’s compensation, the policy of the company is not to try to minimize their salaries and benefits. Rather, the company believes that achieving long-term organization goals of reducing employee turnover and improving employee satisfaction and employee growth require maintaining the level of compensation that is better for company’s than the industry average. This can result for instance, in the absorption cost that the other employers may seek to pass to their workforce. Since Costco business operates on very low margin improvements in various items in income statement, including product and sales price, general and administrative expenses, may have significant implications.

Key Highlights for 2019

1. The organization has opened 25 new warehouses including 5 relocations, 16 net new locations in United States and 4 in other international divisions, including 1st warehouse in China.
2. Net sales increased 8 percent to $149,351, driven by increase in comparable sales and sales in new warehouse in 2018 and 2019 of 6 percent in total. Excluding the effect of new revenue recognition policies on net sales, the gross margin as a percentage of net sales rose by 8 basis points.
3. Net income increased from $3,659 to $3,314, or $8.26 per diluted share, or $7.09 per diluted share in 2018.
4. The governing body and the directors of board has approved a increase in quarterly cash dividend from $0.57 to $0.65 per share in April 2019, and authorized a new $4,000 share repurchase program.

Management Biases in Report

Yes, the company faces few challenges in its IT systems which tracks and manages financial transactions. Management is at fault in this particular situation because it has failed to maintain business ethics. The company relies heavily on information technology to process its financial transactions and other control activities. With the very large volume of transactions Costco conducts, it’s crucial that they keep their business-critical system running uninterrupted.

It was found that a significant deficiency in internal control related to inadequate general control in information technology, and if there company fails to sustain an effective system of internal control in the future, this could result In loss of trust of investors and stock price of the company may be impacted. As of September 2, 2018 the company reported the information in annual report.

The company completed the remediation measure related to material weakness in 2019 and concluded that as of September 1, 2019, the internal control over financial reporting was effective. The company also claims that the remediation not provide guarantee that the remediation or the other control will continue to work properly. If the company failed to maintain its efficiency over the period of time then there will be a negative impact on its brand name and market reputation.

Recommendation to investors and Creditors

1. Costco revenue a positive boost: Net sales for the quarter rose to $36.24 billion, a rise of 5.6 percent over $34.31 billion earned in the beginning quarter of 2019.
2. Costco pays dividend: It’s always nice to own the stock when an otherwise sound investment pays you too. For almost 20 years now Costco has paid a rising quarterly dividend. The company was committed to returning shareholders money.
3. The Current, Quick and Cash ratio indicates that Costco’s current assets have a strong coverage of its current liabilities. A current ratio above 1 shows a company will be its liabilities in the near future.
4. The efficacy ratio details how Costco runs its business. In other words, the calculation in this report shows how efficiently Costco uses its assets or equities to achieve maximum revenues. Costco has been successful in using its assets to make profits on a year-over- year basis.
5. The shares of Costco have performed well on the NASDAQ through a consistent growth over time. The share price chart shows that the price trend is bullish and investors are relatively willing to pay more to purchase the shares because it is been believed that the company will continue to grow in future.

Volcanic Hazards of the Seattle Region: Implications for Strategic Business

The city of Seattle houses corporate headquarters of large corporations that play a strategic role in numerous industries. Corporations such as Boeing, Costco, Microsoft, Starbucks and Weyerhaeuser contribute much to the United States economy. Mt. Rainier, an active volcano in the state of Washington poses a legitimate threat to the not only the city and people of Seattle, but also furthermore to the industries established there. If anything were to happen to the city of Seattle that were to result in these corporations not being able to operate, the United States would be impacted greatly. Costco specifically, if impacted by a natural disaster, would result in not only an effect on the United States, but on several other nations economies.

Costco Wholesale Corporation is the world’s largest retailer behind Walmart and is also known to be the world’s largest retailer of beef, organic foods, wine and rotisserie chicken. Costco also has one of the largest corporation revenues in the United States, as they are ranked #14 in the country on the Forbes 500 rankings. In addition to its headquarters located in Issaquah, Washington, Costco Wholesale Corporation currently operates 776 Costco warehouses worldwide. They operate largely in the United States with 539 locations, but also in Canada, Mexico, the United Kingdom, Japan, South Korea, Taiwan, Australia, Spain, Iceland, France, China and New Zealand. Costco carries a wide variety of products including but not limited to food, wine, liquor, beer, bulk food, art, books, caskets, clothing, electronics, toiletries, cleaning products, furniture, appliances, hot tubs, perishable items, solar panels and auto parts. Their warehouses offer a variety of additional services that include gas stations, pharmacies, photo centers, optometrists, and tire garages. Costco Wholesale Corporation also operates as their label, Kirkland Signature, which accounts for many of their generic products sold in warehouse locations. Unlike Walmart or other competitors, Costco is a members-only retailer that offers additional programs and services to its members. Concierge services, auto programs, business services and food services are offered exclusively to its members. The large amount of goods and services offered to Costco members directly correlates to its success, with a revenue of $141.576 billion in 2018 and reported earnings of $3.134 billion. Costco Wholesale Corporation also is very important for the economy of not only the United States but other nations as it has 245,000 employees as of 2018. Costco Wholesale Corporate Headquarters Located in Issaquah, Washington, Costco’s headquarters is approximately 66 miles from Washington’s Mt. Rainier.

According to the National Park Service, Mt. Rainier is still an active volcano although it has not experienced an eruption cycle in the past 1,000 years. National Geographic argues that Mt. Rainier is one of the most dangerous volcanoes in the world because of the type of eruption it would give off, its slope, and its proximity to civilization. The slope on Mt. Rainier is perfect for lahar formation, fast and violent slurries of lava that will rush down the mountain during an eruption, scientists say. In surrounding areas of Mt. Rainier, 80,000 people are living in areas that future eruptions and lahars are bound to reach, most of whom are in suburbs of the Seattle-Tacoma metropolis. The next eruption of Rainier is inevitable, but also unpredictable, which makes the potential threat and damage much worse. Historically eruptions of Mt. Rainier have alternated between “quiet lava-producing eruptions” and “explosive debris-producing eruptions”, both of which would prove to wreak havoc on the Seattle area. An eruption of Mt. Rainier could result in multiple things including the destruction of roads, bridges, buildings and homes, as well as blackouts in the form of power outages, cell phone tower destruction and loss of communication. The eruption would also release much debris that would affect not only the areas at risk of damage by lahars, but the entire area. Ultimately if an unexpected eruption were to occur, the city of Seattle and its surroundings would see tragedy, death and furthermore economic damage that would affect the world.

Lahar Flow Map Costco Wholesale Corporation faces large potential risks being located as close to Mt. Rainier as they are. With a location 66 miles from the volcano, Costco’s headquarters are bound to be affected greatly by an explosion. One potential risk that the Costco Wholesale corporation faces is the destruction of its corporate headquarters; if lava flow from Mr. Rainier has the potential to destroy roads, bridges and other infrastructure, it most definitely has the potential to destroy its large corporate headquarters. This type of destruction could cause issues such as destruction of data, destruction of goods, misplacement of employees, loss of important information or work not backed up to a database. In addition, because most of the company’s executives are based out of their headquarters, Costco Wholesale Corporation may see a halt or very at large delay to their day-to-day corporate functions. 41 of Costco’s executive officers are based out of this corporate headquarters which poses another potential risk in losing key members to the operation of the Costco Wholesale Corporation.

Although not all, many most likely reside in the Seattle-Tacoma Metropolis, and would ultimately be affected by this potential disaster. One of the potential outcomes of an eruption of Mount Rainier is death, especially if the eruption is violent and lahar formation happens more quickly than residents can evacuate. This would not only affect executive members but many other Costco employees living in the Seattle area who report to the corporation’s headquarters.

The effect that an eruption would have merely on Costco’s home office would ultimately affect the entire corporation. The threat of a blackout that would result in little to no communication with the outside world and to other members of management, their 776 warehouse locations and to investors. Without communication to their warehouses, Costco could see chaos erupt in their retail locations. Managers and employees may ultimately see that in the absence of a corporate headquarters and executive officers, goods and products will start to run out quickly as there will eventually be no new product arriving to warehouses. This may even cause managers and employees to believe that they do not have to still operate during the time of crises, which could result in another threat- looters. Often in time of crisis, society sees that there is an increase in theft of property and goods from stores and residences; with a crisis like so, Costco could see looters attempting theft at closed retail locations as well as from a destroyed corporate headquarters and unattended shipping and storage yards at Seattle’s port.

Finally, a crisis such as the eruption of Mt. Rainier would have an effect on the economy because without corporate operations taking place, shipments not going to stores, and mass chaos overall, Costco’s warehouses would not be able to function on their own for long.

In the best interest of the Costco Wholesale Corporation, it would be most beneficial for the company to either relocate its headquarters to a location that would not be affected by the potential eruption of Mt. Rainier or to establish a crisis plan that would eliminate many of the potential risks associated with said crisis. The future eruption of Mt. Rainier is bound to happen and would have an effect not only on the Seattle home office location, but on the economy and on its locations worldwide.

The Costco’s Customer Service Problem

Don’t you do shopping at Costco wholesale? Here we will examine the customer service problem at Costco. We will look at three issues (turnoffs) with references, and further we will explain the impact of each inadequacy on Costco. As customer satisfaction is fundamental for the accomplishment of the business. Without customer satisfaction, your business will never get viable. We all in all understand the present affiliations dismissal to appreciate the estimation of their customers regarding the accomplishment of their business. Customer help is connected to getting customer back again to buy (thing/organizations) at your company and sending they chipper enough to pass constructive reviews/contribution about the business to other individuals. Additionally, in further part, we will see the issues.

One of the Costco’s customers side street is movement issue. Most by far of the customers says that they have issues with the Costco transport organizations and poor online customer organizations, in view of ask about. Movement issue is a structure side street, it’s definitely not a thing itself. If Costco continues giving issue and frustrate customers with making bothers in movement of things strong conceivable outcomes are there that they will lose tremendous number of customers which will give more opportunities to Costco’s adversaries. It can result into pay incident. Poor customer organization can influence the present/future standard anyway can conflictingly influence a business in an arrangement of ways. This is especially legitimate for associations that rely upon go over business and positive verbal publicizing for its thriving. Despite gambling removing current customers with unacceptable help levels, unendingly poor transport organization can influence the business potential for pulling in new customers as well. Low levels of transport organization can cause you to lose even the most thoughtful of customers. Customers will by and large work with a company since it’s beneficial, it’s an inclination, or they’re scanning for thing or organization which is subtle elsewhere. To be sure, even these ground-breaking customers can be expelled by inferior degrees of movement organization to customer. Customers who experience charming transport organization levels consistently illuminate their friends and family with respect to the horrendous experience to alert them away. This will cost your business potential customers. People will have simply sizes up your business before reliably setting off to your portal. A reputation for movement issues can be hard to shake. It can shield various associations from teaming up or working with you. It also can reject extraordinary business up-and-comers who may acknowledge that if customers are managed deficiently, delegates are managed genuinely as well. Lacking customer organization normally realizes less customers, which changes over into lower arrangements and advantages for your business. This can begin a perpetual circle where a company endeavors to get a decent arrangement on staffing or customer organization getting ready, which makes organization levels winding diving extensively further. A company that can’t keep pace with the budgetary solicitations of keeping up a business faces extending working commitment and in the end, lost the business.

Nearby the movement issue, Costco has in like manner been tumbling in giving extraordinary electronic things. Various customers have been crying about dissatisfaction of electronic things in very present minute. Electronic things are most likely acquired for whole deal use yet as demonstrated by customer reviews they are not using any and all means prepared to use it suitably for present minute as well. A portion of the time low quality can be recognized for ease, yet equipment are generally expensive and that is what customers are not filling satisfied for. This is one of the huge worth turnoffs which may provoke reduction in regard and can without a lot of a stretch decreasing company’s pay as there will be higher number of benefits from the customer to either supersede or fix the thing. As there is more protest, inward work increases with time and ends up being progressively turbulent as well. Inward work augments as there will be more protests in the business place and there will be more complaint related approach the customer care service. With the extension in fights, delegate will get continuously annoyed and won’t want to work for the company in view of negative comments and grumblings. This will provoke an undeniably tumultuous method for human resource and besides loosing human advantage. Costco as per the assessment, in like manner a portion of the time fail to give advantageous thing foundation benefits through an untouchable. As customers complaints they have to make up for lost time drearily, at any rate no undertaking can be seen truly on the contrary side and even their comments on giving late foundation organizations are especially alarming for customers. This has all the earmarks of being crude for customers and losing contact with them. As every buyer must be enthusiast with their new thing purchase and instead of keeping up their energy, Costco fails to keep up their customers due to non-favorable foundation organizations.

As needs be, this also would be shown one of the strong state of mind executioner point for Costco. As customers fights urges associations to enhance the grounds that the impact a protest has on a business by and large constrained by them. If complaints are dealt with insufficiently, customers may draw back their business and urge others to do in like manner. Costco ought to recollect this while giving their anyway pariah. By and large the chances are there, this may scale down their circumstance in the market. Costco moreover gets fights distinctive time about selling of down quality things and customers think this is relied upon to those are at more affordable rate. People think to buy from Costco considering the way that it is progressively notable for customer satisfaction and loyalty rather, they face awful association with nature of things. Beside this, they experience poor response from customer care services. Once in a while even customers feel impolite, unexpected and puzzling response from them. In view of this kind of organization as customers get, they generally choose firm decision that they will completely swear off obtaining again from Costco.

Every business must need to focus on customer care or customer catisfaction since they are the base of any business. Poor customer care may show tremendous temperament executioner point for any business. This can reduce customers just as hurt the reputation in the market, drops the customers lifetime regard. If Costco would not address such grumblings favorable and acceptably and take the necessary steps not to improve benefits and would not offer inspirations to return with resolve as ensured, may similarly influence on the employees retention ratio. They may lose their best agents with losing of customers. As due to reliable calls of frustration from customers, delegates moreover feel terrible and lose trust in the company. To be sure, even Costco may enter profit sucking cycle as a result of creation of such dissatisfaction among customers similarly as laborers. From this time forward, Costco must focus on giving staggering customer satisfaction to lead in the market, to strengthen its position and to keep up the business in an amazingly brilliant manner.

The Main Business Risks for Costco Wholesale Corporation

Introduction to Costco Wholesale Corporation

In 1983, Costco Wholesale Corporation began its operations in Seattle, Washington. It is an industry that puts its focus on the operation of membership warehouses that sell high-quality merchandise at low costs to its members. Costco offers various merchandise that includes food, sundries, hardlines, softlines, and ancillaries. They also provide online services that are not found in any of its warehouses such as e-commerce, business delivery, travel and various others that are in certain countries (Mergent Online). Due to a high volume of competition in the retail industry, Costco has to compete with companies worldwide. Some of its general merchandise retail competitors includes Target, Kroger, and Amazon; however, its main competitors for warehouse club operations are Walmart, Sam’s Club, and BJ’s Wholesale Club.

Overview of Business and Operating Risks

Though Costco may be doing well in its operations, risks in any company are inevitable. The risks that Costco disclosed in its 10-K describe risks that can materially and adversely affect its business. There are three categories for risks: business and operating risks, market and other external risks, and legal and regulatory risks. These risks associated with Costco’s industry, in fact, may affect the auditor’s assessments of the risk of material misstatement and client business risk. A risk of material misstatement is Costco’s reliance on information technology. The process of transactions and managing of its business are dependent on the system. If Costco fails to properly monitor or update the system when needed, it can affect the financial and operational conditions and cause errors by employees. Any material disruption in these systems could lead to understatements and overstatements of its financial statements. Another risk of material misstatement that Costco faces are payment-related risks. Due to the numerous forms of payment, this increases the possibility of fraudulent activities. The payment methods that are accepted includes cash, checks, credit and debit cards, and proprietary cash cards which can lead to a higher fraud loss. Relying on third parties to provide transactions processing services can cause an issue if these companies become hesitant and unable to offer these services to us. Also, having their internal system breached can lead to a failure to accept payments, which can adversely affect the corporation. However, as they offer new payments options to its members, additional rules and regulations need to be implemented to reduce fraud (Costco Annual Report, 2018).

Market and External Risks Facing Costco

Costco also faces client business risks. One is the economic factor, domestically and internationally that may adversely affect its business. Higher energy and gasoline costs, inflation, unsettled financial markets, levels of unemployment, and other economic factors could affect the demand of its products and services. These factors could increase its merchandising costs and selling and general and administrative expenses. Costco is required to comply with federal, state, regional, local, and international laws and regulations and failure to do so could impact its financial and operating conditions. This is another risk that it face regarding client business risks. These laws and regulations includes the use, storage, discharge, and disposal of hazardous waste and materials and other environmental matters. If Costco do not abide by the laws, it can bring forth harm to its environment and will have to pay penalties. Another risk that is associated with client business risks is the vendors. The company face vendors being unable to supply merchandise in a timely manner at competitive prices. This results in decline in sales and profit margins. Its inability to acquire satisfactory merchandise on acceptable terms or the loss of key vendors will negatively affect the company. Costco may have problems with the suppliers that can possibly delay or prevent delivery of merchandise. This risk could lead to tarnishing the reputation and the impact on the company (Costco Annual Report, 2018).

Understanding Costco’s Business for Effective Auditing

It is vital for an auditor to know its company thoroughly. This will help the auditor to properly do the audit by understanding Costco’s business and industry. By management being held responsible for establishing and maintaining adequate internal control over financial statements, they can ensure that it is in accordance with GAAP. In addition, understanding its business operations and processes can be effective information in doing the audit. Gathering as much information about the company as possible can help the auditor to analyze the operations well.

Costco’s Global Operations and Membership Model

Costco is headquartered in Issaquah, Washington but holds different operations in numerous countries. As of September 2, 2018, Costco operated 762 warehouses worldwide, including 527 in the United States, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, two in Spain, one in Iceland, and one in France (NetAdvantage). Also, the company operates e-commerce sites in the United States, Canada, the United Kingdom, Korea, Taiwan, and Mexico. Costco attempts to make up for its revenue by charging an annual membership fee of $55 for business, business add-on membership and executive membership of $110, offering products which the groceries account for more than half of its revenues, and doing operations domestically accounts for about 55% of it total revenues (Nasdaq). In the Stock Analysis on Net report, it showed the significant asset: cash and cash equivalents- $6,055,00; merchandise inventories- $11,040,000; and net property and equipment- $19,861,00. The key suppliers that are important to Costco are the food processing, office supplies, and furniture and fixtures industries (CISMarket). Within the Form 10-K, some forms of external financing are long-term debt and short-term borrowing that helps to sustain the needs of the company. Costco is a big corporation that is continuously evolving. It has several subsidiaries- Costco Wholesale Korea, Costco Wholesale Membership, Inc., NW Re Ltd, Costco Costco Wholesale Canada, Ltd., and Costco Wholesale Taiwan, Ltd. This means they control companies by owning 50% or more of their voting stocks.

Executive Compensation and Governance

Costco is a company that has beneficial programs that motivates its employees to participate in its growth and development. The President and Chief Executive Officer of the company is W. Craig Jelinek. At the end of the fiscal year for 2018, Mr. Jelinek earned a cash bonus of $97,000. During the duration of the year, the total compensation is $7,408,513. His salary for that year totaled to be $800,000; however, the most significant component of his compensation is stock awards with the amount of $6,295,829. Stock awards represents the grant-date fair value of performance-based RBUs. The Executive Vice President and the Chief Financial Officer of Costco is Richard A. Galanti. He received a bonus of $59,040. Mr. Galanti’s compensation totaled to be $4,286,893. At the end of the fiscal year, his salary totaled to be $740,000; however, his most significant compensation is also the stock awards of $3,150,444. Both, Jelinek and Galanti attained the performance criteria that allowed each of them to execute their duties well (Costco Proxy Statement, 2018).

Auditor’s Perspective on Costco’s Financial Health

The auditor must know who is in control or the company in which they are auditing to ensure there is not any material misstatements. The auditor also must be able and willing to perform a preliminary analytical procedures to better understand Costco’s business and industry and to assess client business risk. The auditor must compare Costco’s ratios to the industry to provide insight on how the company is performing. Compared to the industry, the company is doing well. This is represented well in the probability ratios. The return of assets (ROA) is 7.3% while the industry is 4.0%. For return on equity, the Costco is twice as high as the industry which it increased by 16.4%. They are performing well because they are making some sort of profit. There is significant changes in some of the ratios; however for some, there is little to no changes from years. While ratios such as the current ration and quick ratio would not affect the auditor’s assessment. That is because it had no change from the previous to the current year. Costco’s account receivable turnover is 91.3 which is higher than the industry ration of 31.7x. This demonstrates that the company is faster at converting its accounts receivable into cash. From analyzing the ratios, it is evident that Costco is more liquid in earning cash and it has the ability to meet its long-term liabilities. Lastly, the industry’s 23.9% of gross profit is greater than the company’s ration of 13%. Financially, Costco did not do so bad considering the previous year, as well as, the industry (NetAdvantage). These differences results in a good chance of affecting the assessment of the auditor on risk of material misstatements.

An auditor must understand a client’s financial statements such as the balance sheet and income statement. For instance, last year’s total assets and liabilities were $36,347,000 while this year’s total is $40,830,000 which signifies an 11% increase. This increase on this account can materially affect the financial statement. The auditor should be cautious when it comes to these occurrences because they often involve manipulation in accounts. Also, a high risk of material misstatement can be considered since there was a significant change in cash and equivalents of 33%. From this, it can be implied that the company might have a problem in converting accounts receivable into cash. As for the income statement, the significant changes can be found in the expenses and net sales. These accounts are the ones that reflect the financial condition of the company. They both increased by 10% so it is fair to assume a medium risk of material misstatement.

After completing the audit for Costco and having a complete understanding of the industry, as well as, the financial health of the company, Costco could have a low acceptable audit risk and a low risk of material misstatement. Though it is a very large company, its financial statements are presented fairly in all material aspects. The accounts were carefully analyzed and confirmed by higher managers. The realizable value of inventory, however, can be looked as a higher risk because the company is worldwide. Costco is selling a variety of high-quality products for a low price.

The auditor will have to perform numerous steps in performing the audit. As stated, gaining an understanding of the company is vital to learning how the company runs. However, all procedures must be done with cautious to thoroughly investigate and analyze the fluctuations on different accounts. Costco will need to implement the audit 1 evidence mix- extensive amount of testing controls and substantive analytical procedures and small substantive tests of transactions and tests of details of balances. By doing this audit plan procedure, its financial report will be accurate and contain the appropriate information.