Costco Case Summary

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COSTCO Case * In 1998, How were membership fees recorded in COSTCO’s financial statements?

The membership fees recorded as revenue when received in Costco’s financial statement in 1998 according to the cash accounting. * Was this correct? If not, what accounting principle does it violate?

No. It violates the revenue recognition principle because they did not provide services to members when they pay the membership fee during this fiscal year. It can only record this item as unearned revenue under the liabilities and change them into revenue at the end of the year. * How did they fix it?

They changed to use accrual accounting instead of cash accounting to fix the membership fees revenue. * What were the effects of the
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Finally, the company’s net income increased $48,106,000. * Was the recording and the subsequent change of “Direct Response Advertising” correct? If not, what accounting principle does it violate?

The recording and the subsequent change was incorrect and violates the matching principle. * How did they fix it?

They wrote off the deferred subscriber acquisition costs as expense to fix it. After Sep 30st 1996, the company changed the method of recording the deferred subscriber acquisition costs as assets to as expenses according to “SOP 93-7”. Accounting rules regulate that companies can only capitalize “direct response advertising costs” when they can demonstrate that they benefit from the advertising activities directly. However, as a high-tech company, AOL can’t meet with such requirement. So, it should consider these advertising costs to be expense

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