Reorganizing the Accounting Statements: In Practice  213
would lead to a definition of NOPAT that is inconsistent with invested capital. 
NOPAT is the income available to both debt and equity holders, so when you 
are determining ROIC, you should divide NOPAT by debt plus equity. Al-
though a supplier may charge customers implicit interest for the right to pay 
in 30 days, the charge is an indistinguishable part of the price, and hence an 
indistinguishable and inseparable part of the cost of goods sold. Since cost of 
EXHIBIT 11.5  Costco: Invested Capital and Total Funds Invested
$ million
2015
2016
2017
2018
2019
Operating cash1
2,324
2,374
2,581
2,832
3,054
Receivables, net
1,224
1,252
1,432
1,669
1,535
Merchandise Inventories
8,908
8,969
9,834
11,040
11,395
Other current assets
227
268
272
321
1,111
Operating current assets
12,683
12,863
14,119
15,862
17,095
Accounts payable
(9,011)
(7,612)
(9,608)
(11,237)
(11,679)
Accrued salaries and benefits
(2,468)
(2,629)
(2,703)
(2,994)
(3,176)
Accrued member awards
(813)
(869)
(961)
(1,057)
(1,180)
Deferred membership fees
(1,269)
(1,362)
(1,498)
(1,624)
(1,711)
Other current liabilities
(1,686)
(1,993)
(2,632)
(2,917)
(3,766)
Operating current liabilities
(15,247)
(14,465)
(17,402)
(19,829)
(21,512)
Operating working capital
(2,564)
(1,602)
(3,284)
(3,967)
(4,417)
Property, plant, and equipment
15,401
17,043
18,161
19,681
20,890
Capitalized operating leases2
2,230
2,320
2,528
2,500
2,414
Other assets3
631
700
615
544
627
Other liabilities3
(445)
(534)
(515)
(607)
(517)
Invested capital
15,253
17,928
17,506
18,151
18,997
Excess cash1
4,095
2,355
3,199
4,427
6,390
Foreign tax credit carryforward4
—
—
—
—
65
Total funds invested
19,348
20,282
20,704
22,578
25,452
Reconciliation of total funds invested
Long-term debt and capital leases5
6,443
5,535
7,039
6,974
7,244
Capitalized operating leases2
2,230
2,320
2,528
2,500
2,414
Debt and debt equivalents
8,673
7,855
9,567
9,474
9,658
Deferred income taxes, operating4
(61)
158
76
(39)
120
Deferred income taxes, nonoperating4
(107)
(63)
(18)
40
90
Noncontrolling interests
226
253
301
304
341
Costco shareholders’ equity
10,617
12,079
10,778
12,799
15,243
Equity and equity equivalents
10,675
12,427
11,137
13,104
15,794
Total funds invested
19,348
20,282
20,704
22,578
25,452
1 Operating cash estimated at 2% of revenues. Remaining cash is treated as excess cash.
2 Capitalized operating leases are estimated for 2019 in Exhibit 22.10.
3 Other assets and liabilities are classified as operating because no description is provided by the company.
4 Foreign tax credit carryforward and other deferred taxes are reported in Exhibit 11.7.
5 Includes current portion.

214  Reorganizing the Financial Statements 
goods sold is subtracted from revenue to determine NOPAT, operating liabili-
ties must be subtracted from operating assets to determine invested capital. A 
theoretical but cumbersome alternative would be to treat accounts payable as 
debt and adjust NOPAT for the implicit interest cost.
Property, Plant, Equipment, and Other Capitalized Investments  Include 
the book value of property, plant, and equipment net of accumulated depreci-
ation in operating assets. Book value measures the company’s ability to create 
value on past investments. Use market value or replacement cost only when 
evaluating the sale or replacement of a specific asset.
Some companies, including IBM and UPS, have significant investments 
in software they have developed for internal use. Under certain restrictions, 
these investments can be capitalized on the balance sheet rather than immedi-
ately expensed. Although it is labeled as an intangible asset, treat capitalized 
software no differently than property and equipment; treat amortization as if 
it were depreciation; and treat investments in capitalized software as if they 
were capital expenditures. (The cash flow statement in the IBM annual report 
separates investment in software from investment in PP&E. In contrast, UPS 
combines the two accounts within capital expenditures. In this case, attributing 
reported capitalized expenditures entirely to PP&E would overstate the actual 
investment.) Only internally generated intangible assets, and not acquired 
intangibles, should be treated in this manner. Acquired intangibles require 
special care and are discussed in a later subsection in this chapter.
Other Operating Assets, Net of Liabilities  If other long-term assets and li-
abilities are small—and not detailed by the company—we typically assume 
they are operating. To determine net other long-term operating assets, sub-
tract other long-term liabilities from other long-term assets. This figure should 
be included as part of invested capital. If, however, other long-term assets and 
liabilities are relatively large, you will need to disaggregate each account into 
its operating and nonoperating components before you can calculate other 
long-term operating assets, net of other liabilities.
For instance, a relatively large other long-term assets account might in-
clude nonoperating items such as deferred-tax assets, prepaid pension assets, 
nonconsolidated subsidiaries, or other equity investments. Nonoperating 
items should not be included in invested capital. Classifying assets as operat-
ing or nonoperating requires judgment, especially for obscure accounts. For 
instance, we treat restricted cash as operating when cash must be set aside to 
secure third-party guarantees, as is the case with distressed airlines that accept 
credit card payments with payment insurance. As a helpful guidepost, operat-
ing assets typically scale with revenues.
Long-term liabilities might similarly include operating and nonoperating 
items. Operating liabilities are liabilities that result directly from an ongoing