Direct Computation of Nonoperating Return Balance sheets and income statements for Costco Wholesale Corporation follow Consolidated Statements of Earnings For Fiscal Years Ended ($ millions) September 1, 2013 September 2, 2012 August 28, 2011 Revenue Net Sales $102,870 $97,062 $87,048 Membership fees 2,286 2,075 1,867 Total revenue 105,156 99,137 88,915 Operating expenses Merchandise costs 91,948 86,823 77,739 Selling, general and administrative 10,104 9,518 8,691 Preopening expenses 51 37 46 Operating Income 3,053 2,759 2,439 Other income (expense) Interest expense (99) (95) (116) Interest income and other, net 97 103 60 Income before income taxes 3,051 2,767 2,383 Provision for income taxes 990 1,000 841 Net income including noncontrolling interests 2,061 1,767 1,542 Net income attributable to noncontrolling interests (22) (58) (80) Net income attributable to Costco $ 2,039 $ 1,709 $ 1,462 Consolidated Balance Sheets ($ millions, except par value and share data) September 1, 2013 September 2, 2012 Assets Current assets Cash and cash equivalents $ 4,644 $ 3,528 Short term investments 1,480 1,326 Receivables, net 1,201 1,026 Merchandise inventories 7,894 7,096 Deferred income taxes and other current assets 621 550 Total current assets 15,840 13,526 Property and equipment Land 4,409 4,032 Buildings and improvements 11,556 10,879 Equipment and fixtures 4,472 4,261 Construction in progress 585 374 21,022 19,546 Less accumulated depreciation and amortization (7,141) (6,585) Net property and equipment 13,881 12,961 Other assets 562 653 Total assets $ 30,283 $ 27,140 Liabilities and equity Current liabilities Accounts payable $ 7,872 $ 7,303 Accrued salaries and benefits 2,037 1,832 Accrued member rewards 710 661 Accrued sales and other taxes 382 397 Deferred membership fees 1,167 1,101 Other current liabilities 1,089 966 Total current liabilities 13,257 12,260 Long term debt, excluding current portion 4,998 1,381 Deferred income taxes and other liabilities 1,016 981 Total liabilities 19,271 14,622 Equity Preferred stock, $0 005 par value 100,000,000 shares authorized no shares issued and outstanding 0 0 Common stock, $0 005 par value 900,000,000 shares authorized 436,839,000 and 432,350,000 shares issued and outstanding 2 2 Additional paid in capital 4,670 4,369 Accumulated other comprehensive (loss) income (122) 156 Retained earnings 6,283 7,834 Total Costco stockholders equity 10,833 12,361 Noncontrolling interests 179 157 Total equity 11,012 12,518 Total liabilities and equity $ 30,283 $ 27,140 (a) Compute the following for Costco Hint RNOA is 21 78 and NOPAT is $2,062 Rounding instructions Do not round until your final answer Round FLEV and NCI ratio four decimal places Round Spread and NNEP two decimal places Remember to use negative signs in answers when appropriate 2013 NNO (Net non operating obligations) $Answer 2012 NNO (Net non operating obligations) $Answer 2013 NNE (Net non operating expense) $Answer 2013 NNEP (Net non operating expense percent) Answer 2013 FLEV Answer 2013 Spread Answer 2013 NCI ratio Answer (b) Assume that Costco's return on equity (ROE) for 2013 is 17 58 and its return on net operating assets (RNOA) is 21 78 Confirm computations to yield the relation ROE RNOA (FLEV X Spread) X NCI ratio 2013 ROE Answer Answer (Answer X Answer) X Answer (c) What do your computations of the nonoperating return in parts (a) and (b) imply about the company's use of borrowed funds Costco's FLEV is negative meaning its non operating assets exceed its non operating liabilities Costco has a high level of short term investments to use for new opportunities Costco's FLEV is negative meaning its non operating liabilities exceed its non operating assets Costco will need to rely on debt to finance new opportunities Costco's FLEV is positive meaning its non operating assets exceed its non operating liabilities Costco has a high level of short term investments to use for new opportunities Costco's FLEV is positive meaning its non operating liabilities exceed its non operating assets Costco will need to rely on debt to finance new opportunities

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Direct Computation of Nonoperating Return Balance sheets and income statements for Costco Wholesale Corporation follow. Consolidated Statements of Earnings For Fiscal Years Ended ($ millions)

Direct Computation of Nonoperating Return Balance sheets and income statements for Costco Wholesale Corporation follow.

Consolidated Statements of Earnings
For Fiscal Years Ended ($ millions)	September 1, 2013	September 2, 2012	August 28, 2011
Revenue
Net Sales	$102,870	$97,062	$87,048
Membership fees	2,286	2,075	1,867
Total revenue	105,156	99,137	88,915
Operating expenses
Merchandise costs	91,948	86,823	77,739
Selling, general and administrative	10,104	9,518	8,691
Preopening expenses	51	37	46
Operating Income	3,053	2,759	2,439
Other income (expense)
Interest expense	(99)	(95)	(116)
Interest income and other, net	97	103	60
Income before income taxes	3,051	2,767	2,383
Provision for income taxes	990	1,000	841
Net income including noncontrolling interests	2,061	1,767	1,542
Net income attributable to noncontrolling interests	(22)	(58)	(80)
Net income attributable to Costco	$ 2,039	$ 1,709	$ 1,462

Consolidated Balance Sheets
($ millions, except par value and share data)	September 1, 2013	September 2, 2012
Assets
Current assets
Cash and cash equivalents	$ 4,644	$ 3,528
Short-term investments	1,480	1,326
Receivables, net	1,201	1,026
Merchandise inventories	7,894	7,096
Deferred income taxes and other current assets	621	550
Total current assets	15,840	13,526
Property and equipment
Land	4,409	4,032
Buildings and improvements	11,556	10,879
Equipment and fixtures	4,472	4,261
Construction in progress	585	374
	21,022	19,546
Less accumulated depreciation and amortization	(7,141)	(6,585)
Net property and equipment	13,881	12,961
Other assets	562	653
Total assets	$ 30,283	$ 27,140
Liabilities and equity
Current liabilities
Accounts payable	$ 7,872	$ 7,303
Accrued salaries and benefits	2,037	1,832
Accrued member rewards	710	661
Accrued sales and other taxes	382	397
Deferred membership fees	1,167	1,101
Other current liabilities	1,089	966
Total current liabilities	13,257	12,260
Long-term debt, excluding current portion	4,998	1,381
Deferred income taxes and other liabilities	1,016	981
Total liabilities	19,271	14,622
Equity
Preferred stock, $0.005 par value:
100,000,000 shares authorized; no shares issued and outstanding	0	0
Common stock, $0.005 par value:
900,000,000 shares authorized;
436,839,000 and 432,350,000 shares issued and outstanding	2	2
Additional paid-in-capital	4,670	4,369
Accumulated other comprehensive (loss) income	(122)	156
Retained earnings	6,283	7,834
Total Costco stockholders equity	10,833	12,361
Noncontrolling interests	179	157
Total equity	11,012	12,518
Total liabilities and equity	$ 30,283	$ 27,140

(a) Compute the following for Costco. Hint: RNOA is 21.78% and NOPAT is $2,062. Rounding instructions: Do not round until your final answer. Round FLEV and NCI ratio four decimal places. Round Spread and NNEP two decimal places. Remember to use negative signs in answers when appropriate. 2013 NNO (Net non-operating obligations) =$Answer 2012 NNO (Net non-operating obligations) =$Answer 2013 NNE (Net non-operating expense) =$Answer 2013 NNEP (Net non-operating expense percent) =Answer% 2013 FLEV =Answer 2013 Spread =Answer% 2013 NCI ratio =Answer

(b) Assume that Costco's return on equity (ROE) for 2013 is 17.58% and its return on net operating assets (RNOA) is 21.78%. Confirm computations to yield the relation: ROE = [RNOA + (FLEV X Spread)] X NCI ratio. 2013 ROE =Answer% = [Answer%+(Answer X Answer)] X Answer (c) What do your computations of the nonoperating return in parts (a) and (b) imply about the company's use of borrowed funds

Costco's FLEV is negative - meaning its non-operating assets exceed its non-operating liabilities. Costco has a high level of short term investments to use for new opportunities.

Costco's FLEV is negative - meaning its non-operating liabilities exceed its non operating assets. Costco will need to rely on debt to finance new opportunities.

Costco's FLEV is positive - meaning its non-operating assets exceed its non-operating liabilities. Costco has a high level of short term investments to use for new opportunities.

Costco's FLEV is positive - meaning its non-operating liabilities exceed its non-operating assets. Costco will need to rely on debt to finance new opportunities.