Following the financial statements in an annual report is what is called the "Notes to Consolidated Financial Statements." These notes are an important part of the financial statements and can help clarify some of the amounts on the financial statements. No. 1 is usually titled "Summary of Significant Accounting Policies."

Instructions: 

1. In Appendix B of this textbook, find the paragraph in Note No. 1 titled "Use of Estimates" on page B-10. Summarize the note in one sentence.

2. Give at least one example of an estimate that is used in accounting.

3. Why is it necessary to use estimates in accounting?

Data from Appendix B page B-10

Transcribed Image Text:

COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 1-Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Costco Wholesale Corporation, a Washington corporation, and its subsidiaries ("Costco" or the "Company"). All material inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation. Costco operates membership warehouses that offer low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories in no-frills, self- service warehouse facilities. At September 3, 2006, Costco operated 487 warehouses: 354 in the United States and four in Puerto Rico; 68 in Canada; 18 in the United Kingdom; 5 in Korea; 4 in Taiwan; 5 in Japan; and 29 warehouses in Mexico (through a 50%-owned joint venture). The Company's investments in the Costco Mexico joint venture and in other unconsolidated joint ventures that are less than majority owned are accounted for under the equity method. The investment in Costco Mexico is included in other assets and was $270,304 at September 3, 2006 and $232,402 at August 28, 2005. The equity in earnings of Costco Mexico is included in interest income and other in the accompanying consolidated statements of income, and for fiscal 2006, 2005 and 2004, was $26,646, $24,949 and $22,208, respectively. The amount of retained earnings that represents undistributed earnings of Costco Mexico was $159,877 and $133,231 at September 3, 2006 and August 28, 2005, respectively. The Company, in accordance with Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108), adjusted its beginning retained earnings for fiscal 2006 in the accompanying consolidated financial statements. See Note 11 for additional information on the adoption SAB 108.