222  Reorganizing the Financial Statements 
EXHIBIT 11.8  Costco: Income Statement
$ million
2015
2016
2017
2018
2019
Merchandise sales
113,666
116,073
126,172
138,434
149,351
Membership fees
2,533
2,646
2,853
3,142
3,352
Revenues
116,199
118,719
129,025
141,576
152,703
Merchandise costs
(101,065)
(102,901)
(111,882)
(123,152)
(132,886)
Selling, general, and administrative
(10,318)
(10,813)
(11,580)
(12,439)
(13,502)
Depreciation1
(1,127)
(1,255)
(1,370)
(1,437)
(1,492)
Preopening expenses
(65)
(78)
(82)
(68)
(86)
Operating income
3,624
3,672
4,111
4,480
4,737
Interest expense
(124)
(133)
(134)
(159)
(150)
Interest income
50
41
50
75
126
Other income
54
39
12
46
52
Earnings before taxes
3,604
3,619
4,039
4,442
4,765
Provision for income taxes
(1,195)
(1,243)
(1,325)
(1,263)
(1,061)
Net income, consolidated
2,409
2,376
2,714
3,179
3,704
Net income, noncontrolling interests
(32)
(26)
(35)
(45)
(45)
Net income, Costco
2,377
2,350
2,679
3,134
3,659
1 Aggregated in selling, general, and administrative expenses in original filings.
any measure of profit (and return) must recognize this loss in value. While 
depreciation does not match the periodic loss in value perfectly, it is a suitable 
proxy.
Why use EBITA and not EBIT? After all, the same argument could be 
made for the amortization of acquired intangibles: they, too, have fixed lives 
and lose value over time. But the accounting for intangibles differs from 
the accounting for physical assets. Unlike capital expenditures, internally 
created intangible assets such as new customer lists and product brands are 
expensed and not capitalized. Thus, when the acquired intangible loses value 
and is replaced through additional investment internally, the reinvestment 
is already expensed, and the company is penalized twice in the same time 
period: once through amortization and a second time through reinvestment. 
Although not perfect, using EBITA is consistent with existing accounting 
rules.
Choosing which line items to include as operating expenses requires 
judgment. As a guiding principle, include ongoing expenses related to the 
company’s core operations. One company we recently analyzed included ra-
tionalizations as part of operating expenses. Since rationalizations had been a 
consistent part of the company’s expense structure and are likely to continue 
as the industry continues to mature, we kept them as operating expenses. Had 
they been a one-time expense, we would not have included them in EBITA.

Reorganizing the Accounting Statements: In Practice  223
EXHIBIT 11.9  Costco: NOPAT and Its Reconciliation to Net Income
$ million
2015
2016
2017
2018
2019
Revenue
116,199
118,719
129,025
141,576
152,703
Merchandise costs
(101,065)
(102,901)
(111,882)
(123,152)
(132,886)
Selling, general, and administrative
(10,318)
(10,813)
(11,580)
(12,439)
(13,502)
Depreciation
(1,127)
(1,255)
(1,370)
(1,437)
(1,492)
Preopening expenses
(65)
(78)
(82)
(68)
(86)
EBITA, unadjusted1
3,624
3,672
4,111
4,480
4,737
Operating lease interest2
73
75
57
74
91
EBITA, adjusted
3,697
3,747
4,168
4,554
4,828
Operating cash taxes3
(1,184)
(1,149)
(1,493)
(1,455)
(1,009)
NOPAT
2,513
2,598
2,675
3,098
3,818
Reconciliation to net income
Net income, consolidated
2,409
2,376
2,714
3,179
3,704
Operating taxes deferred3
7
219
(82)
(115)
159
Adjusted net income
2,416
2,595
2,632
3,064
3,863
Interest expense
124
133
134
159
150
Operating lease interest2
73
75
57
74
91
Interest income
(50)
(41)
(50)
(75)
(126)
Other income4
(54)
(39)
(12)
(46)
(52)
Taxes related to nonoperating accounts5
(35)
(48)
(49)
(32)
(15)
Other nonoperating taxes3
39
(77)
(37)
(45)
(92)
NOPAT
2,513
2,598
2,675
3,098
3,818
1 Earnings before interest, taxes, and amortization.
2 Operating lease interest is estimated in Exhibit 11.15.
3 Operating cash taxes and other nonoperating taxes are detailed in Exhibit 11.11. 
4 Other income consists primarily of foreign-currency transaction gains and treated as nonoperating for simplicity of exposition.
5 Estimated by multiplying the statutory tax rate by the sum of interest and operating lease interest expense, less the sum of interest and other income. The statutory 
tax rate is reported in Exhibit 11.10.
Adjustments to EBITA  In many companies, nonoperating items are embed-
ded within operating expenses. To ensure that your EBITA calculation flows 
solely from operations, dig through the notes to weed out nonoperating items 
from operating expenses. The most common nonoperating items are related 
to pensions, embedded interest expenses from operating leases, and one-time 
restructuring charges hidden in the cost of sales.
In Exhibit 11.9, we adjust operating profit for operating lease interest. 
Since Costco does not offer defined-benefit retirement plans, no adjustment 
was made for the nonoperating portion of pension expense. The comprehen-
sive processes for operating leases and pensions are addressed at the end of 
this chapter and in Part Three of this book, which covers advanced valuation 
issues.
No other adjustments were required, as Costco did not embed material 
one-time items in operating expenses. Although not common, it can ­happen.