Item 16. Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

October 17, 2017

	COSTCO WHOLESALE CORPORATION (Registrant)
	By		/s/ RICHARD A. GALANTI
			Richard A. Galanti Executive Vice President, Chief Financial Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By		/s/ W. CRAIG JELINEK				October 17, 2017
		W. Craig Jelinek President, Chief Executive Officer and Director
By		/s/ HAMILTON E. JAMES				October 17, 2017
		Hamilton E. James Chairman of the Board
By		/s/ RICHARD A. GALANTI				October 17, 2017
		Richard A. Galanti Executive Vice President, Chief Financial Officer and Director (Principal Financial Officer)
By		/s/ DANIEL M. HINES				October 17, 2017
		Daniel M. Hines Senior Vice President and Corporate Controller (Principal Accounting Officer)
By		/s/ SUSAN L. DECKER				October 17, 2017
		Susan L. Decker Director
By		/s/ KENNETH D. DENMAN				October 17, 2017
		Kenneth D. Denman Director
By		/s/ DANIEL J. EVANS				October 17, 2017
		Daniel J. Evans Director

By		/s/ JOHN W. MEISENBACH				October 17, 2017
		John W. Meisenbach Director
By		/s/ CHARLES T. MUNGER				October 17, 2017
		Charles T. Munger Director
By		/S/ JEFFREY S. RAIKES				October 17, 2017
		Jeffrey S. Raikes Director
By		/S/ JAMES D. SINGEGAL				October 17, 2017
		James D. Sinegal Director
By		/S/ JOHN W. STANTON				October 17, 2017
		John W. Stanton Director
By		/S/ MAGGIE WILDEROTTER				October 17, 2017
		Maggie Wilderotter Director

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Costco Wholesale Corporation:

We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation as of September 3, 2017 and August 28, 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the 53-week period ended September 3, 2017 and the 52-week periods ended August 28, 2016 and August 30, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Costco Wholesale Corporation and subsidiaries as of September 3, 2017 and August 28, 2016, and the results of their operations and their cash flows for the 53-week period ended September 3, 2017, and the 52-week periods ended August 28, 2016 and August 30, 2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Costco Wholesale Corporation’s internal control over financial reporting as of September 3, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 17, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Seattle, Washington

October 17, 2017

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Costco Wholesale Corporation:

We have audited Costco Wholesale Corporation’s (the Company) internal control over financial reporting as of September 3, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 3, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of September 3, 2017 and August 28, 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the 53-week period ended September 3, 2017, and the 52-week periods ended August 28, 2016 and August 30, 2015, and our report dated October 17, 2017 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Seattle, Washington

October 17, 2017

COSTCO WHOLESALE CORPORATION

CONSOLIDATED BALANCE SHEETS

(amounts in millions, except par value and share data)

	September 3, 2017				August 28, 2016
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	4,546			$	3,379
Short-term investments	1,233				1,350
Receivables, net	1,432				1,252
Merchandise inventories	9,834				8,969
Other current assets	272				268
Total current assets	17,317				15,218
PROPERTY AND EQUIPMENT
Land	5,690				5,395
Buildings and improvements	15,127				13,994
Equipment and fixtures	6,681				6,077
Construction in progress	843				701
	28,341				26,167
Less accumulated depreciation and amortization	(10,180		)		(9,124		)
Net property and equipment	18,161				17,043
OTHER ASSETS	869				902
TOTAL ASSETS	$	36,347			$	33,163
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	9,608			$	7,612
Current portion of long-term debt	86				1,100
Accrued salaries and benefits	2,703				2,629
Accrued member rewards	961				869
Deferred membership fees	1,498				1,362
Other current liabilities	2,639				2,003
Total current liabilities	17,495				15,575
LONG-TERM DEBT, excluding current portion	6,573				4,061
OTHER LIABILITIES	1,200				1,195
Total liabilities	25,268				20,831
COMMITMENTS AND CONTINGENCIES
EQUITY
Preferred stock $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding	0				0
Common stock $.01 par value; 900,000,000 shares authorized; 437,204,000 and 437,524,000 shares issued and outstanding	4				2
Additional paid-in capital	5,800				5,490
Accumulated other comprehensive loss	(1,014		)		(1,099		)
Retained earnings	5,988				7,686
Total Costco stockholders’ equity	10,778				12,079
Noncontrolling interests	301				253
Total equity	11,079				12,332
TOTAL LIABILITIES AND EQUITY	$	36,347			$	33,163

The accompanying notes are an integral part of these consolidated financial statements.

COSTCO WHOLESALE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(amounts in millions, except per share data)

	53 Weeks Ended				52 Weeks Ended				52 Weeks Ended
	September 3, 2017				August 28, 2016				August 30, 2015
REVENUE
Net sales	$	126,172			$	116,073			$	113,666
Membership fees	2,853				2,646				2,533
Total revenue	129,025				118,719				116,199
OPERATING EXPENSES
Merchandise costs	111,882				102,901				101,065
Selling, general and administrative	12,950				12,068				11,445
Preopening expenses	82				78				65
Operating income	4,111				3,672				3,624
OTHER INCOME (EXPENSE)
Interest expense	(134		)		(133		)		(124		)
Interest income and other, net	62				80				104
INCOME BEFORE INCOME TAXES	4,039				3,619				3,604
Provision for income taxes	1,325				1,243				1,195
Net income including noncontrolling interests	2,714				2,376				2,409
Net income attributable to noncontrolling interests	(35		)		(26		)		(32		)
NET INCOME ATTRIBUTABLE TO COSTCO	$	2,679			$	2,350			$	2,377
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
Basic	$	6.11			$	5.36			$	5.41
Diluted	$	6.08			$	5.33			$	5.37
Shares used in calculation (000’s)
Basic	438,437				438,585				439,455
Diluted	440,937				441,263				442,716
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	8.90			$	1.70			$	6.51

The accompanying notes are an integral part of these consolidated financial statements.

COSTCO WHOLESALE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in millions)

	53 Weeks Ended				52 Weeks Ended				52 Weeks Ended
	September 3, 2017				August 28, 2016				August 30, 2015
NET INCOME INCLUDING NONCONTROLLING INTERESTS	$	2,714			$	2,376			$	2,409
Foreign-currency translation adjustment and other, net	98				26				(1,063		)
Comprehensive income	2,812				2,402				1,346
Less: Comprehensive income attributable to noncontrolling interests	48				30				14
COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO	$	2,764			$	2,372			$	1,332

The accompanying notes are an integral part of these consolidated financial statements.

COSTCO WHOLESALE CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(amounts in millions)

	Common Stock							Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Total Costco Stockholders’ Equity				Noncontrolling Interests				Total Equity
	Shares (000’s)			Amount
BALANCE AT AUGUST 31, 2014	437,683			$	2			$	4,919			$	(76	)		$	7,458			$	12,303			$	212			$	12,515
Net income	—			—				—				—				2,377				2,377				32				2,409
Foreign-currency translation adjustment and other, net	—			—				—				(1,045		)		—				(1,045		)		(18		)		(1,063		)
Stock-based compensation	—			—				394				—				—				394				—				394
Stock options exercised, including tax effects	989			—				69				—				—				69				—				69
Release of vested restricted stock units (RSUs), including tax effects	2,736			—				(122		)		—				—				(122		)		—				(122		)
Repurchases of common stock	(3,456	)		—				(42		)		—				(452		)		(494		)		—				(494		)
Cash dividends declared and other	—			—				—				—				(2,865		)		(2,865		)		—				(2,865		)
BALANCE AT AUGUST 30, 2015	437,952			2				5,218				(1,121		)		6,518				10,617				226				10,843
Net income	—			—				—				—				2,350				2,350				26				2,376
Foreign-currency translation adjustment and other, net	—			—				—				22				—				22				4				26
Stock-based compensation	—			—				459				—				—				459				—				459
Stock options exercised, including tax effects	4			—				—				—				—				—				—				—
Release of vested RSUs, including tax effects	2,749			—				(146		)		—				—				(146		)		—				(146		)
Conversion of convertible notes	3			—				—				—				—				—				—				—
Repurchases of common stock	(3,184	)		—				(41		)		—				(436		)		(477		)		—				(477		)
Cash dividends declared and other	—			—				—				—				(746		)		(746		)		(3		)		(749		)
BALANCE AT AUGUST 28, 2016	437,524			2				5,490				(1,099		)		7,686				12,079				253				12,332
Net income	—			—				—				—				2,679				2,679				35				2,714
Foreign-currency translation adjustment and other, net	—			—				—				85				—				85				13				98
Stock-based compensation	—			—				518				—				—				518				—				518
Release of vested RSUs, including tax effects	2,673			—				(165		)		—				—				(165		)		—				(165		)
Conversion of convertible notes	5			—				—				—				—				—				—				—
Repurchases of common stock	(2,998	)		—				(41		)		—				(432		)		(473		)		—				(473		)
Cash dividends declared and other	—			2				(2		)		—				(3,945		)		(3,945		)		—				(3,945		)
BALANCE AT SEPTEMBER 3, 2017	437,204			$	4			$	5,800			$	(1,014	)		$	5,988			$	10,778			$	301			$	11,079

The accompanying notes are an integral part of these consolidated financial statements.

COSTCO WHOLESALE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in millions)

	53 Weeks Ended				52 Weeks Ended				52 Weeks Ended
	September 3, 2017				August 28, 2016				August 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income including noncontrolling interests	$	2,714			$	2,376			$	2,409
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization	1,370				1,255				1,127
Stock-based compensation	514				459				394
Excess tax benefits on stock-based awards	(38		)		(74		)		(86		)
Other non-cash operating activities, net	24				17				(5		)
Deferred income taxes	(29		)		269				(101		)
Changes in operating assets and liabilities:
Merchandise inventories	(894		)		(25		)		(890		)
Accounts payable	2,258				(1,532		)		880
Other operating assets and liabilities, net	807				547				557
Net cash provided by operating activities	6,726				3,292				4,285
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments	(1,279		)		(1,432		)		(1,501		)
Maturities and sales of short-term investments	1,385				1,709				1,434
Additions to property and equipment	(2,502		)		(2,649		)		(2,393		)
Other investing activities, net	30				27				(20		)
Net cash used in investing activities	(2,366		)		(2,345		)		(2,480		)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in bank checks outstanding	(236		)		81				(45		)
Repayments of short-term borrowings	0				(106		)		(51		)
Proceeds from short-term borrowings	0				106				51
Proceeds from issuance of long-term debt	3,782				185				1,125
Repayments of long-term debt	(2,200		)		(1,288		)		(1		)
Minimum tax withholdings on stock-based awards	(202		)		(220		)		(178		)
Excess tax benefits on stock-based awards	38				74				86
Repurchases of common stock	(469		)		(486		)		(481		)
Cash dividend payments	(3,904		)		(746		)		(2,865		)
Other financing activities, net	(27		)		(19		)		35
Net cash used in financing activities	(3,218		)		(2,419		)		(2,324		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	25				50				(418		)
Net change in cash and cash equivalents	1,167				(1,422		)		(937		)
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR	3,379				4,801				5,738
CASH AND CASH EQUIVALENTS END OF YEAR	$	4,546			$	3,379			$	4,801
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (reduced by $16, $19, and $14, interest capitalized in 2017, 2016, and 2015, respectively)	$	131			$	123			$	117
Income taxes, net	$	1,185			$	953			$	1,186
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property acquired under build-to-suit and capital leases	$	17			$	15			$	109

The accompanying notes are an integral part of these consolidated financial statements.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data)

Note 1—Summary of Significant Accounting Policies

Description of Business

Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At September 3, 2017, Costco operated 741 warehouses worldwide: 514 United States (U.S.) locations (in 44 U.S. states, Washington, D.C., and Puerto Rico), 97 Canada locations, 37 Mexico locations, 28 United Kingdom (U.K.) locations, 26 Japan locations, 13 Korea locations, 13 Taiwan locations, nine Australia locations, two Spain locations, one Iceland location, and one France location. The Company operates its e-commerce websites in all countries except Japan, Australia, Spain, Iceland, and France.

Basis of Presentation

The consolidated financial statements include the accounts of Costco Wholesale Corporation, its wholly-owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. The Company’s net income excludes income attributable to noncontrolling interests in its operations in Taiwan and Korea. Unless otherwise noted, references to net income relate to net income attributable to Costco.

Fiscal Year End

The Company operates on a 52/53 week fiscal year basis with the fiscal year ending on the Sunday closest to August 31. References to 2017 relate to the 53-week fiscal year ended September 3, 2017. References to 2016 and 2015 relate to the 52-week fiscal years ended August 28, 2016, and August 30, 2015, respectively.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

Cash and Cash Equivalents

The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to four days. Credit and debit card receivables were $1,255 and $1,071 at the end of 2017 and 2016, respectively.

The Company provides for the daily replenishment of major bank accounts as checks are presented. Included in accounts payable at the end of 2017 and 2016 are $383 and $619, respectively, representing the excess of outstanding checks over cash on deposit at the banks on which the checks were drawn. The Company accelerated vendor payments of approximately $1,700 in the last week of fiscal 2016 in advance of implementing its modernized accounting system in fiscal 2017.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

Short-Term Investments

In general, short-term investments have a maturity at the date of purchase of three months to five years. Investments with maturities beyond five years may be classified, based on the Company’s determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis.

The Company periodically evaluates unrealized losses in its investment securities for other-than-temporary impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other-than-temporarily impaired, the Company recognizes the loss in interest income and other, net in the consolidated statements of income.

Fair Value of Financial Instruments

The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company’s financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for the carrying value and fair value of the Company’s investments, derivative instruments, and fixed-rate debt, respectively.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market

data.

Level 3: Significant unobservable inputs that are not corroborated by market data.

The Company’s valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two-sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and Libor and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred.

Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance price and adjusted for unamortized discounts or premiums and debt issuance costs, which are being amortized to interest expense over the term of the loan. The estimated fair value of the Company's long-term debt is based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

Receivables, Net

Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other receivables. Vendor receivables include coupons, volume rebates or other purchase discounts. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor, in which case the receivables are presented on a net basis. Reinsurance receivables are held by the Company’s wholly-owned captive insurance subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the amounts assumed under reinsurance, which are presented within other current liabilities in the consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under the co-branded credit card arrangement in the U.S. Third-party pharmacy receivables generally relate to amounts due from members’ insurance companies. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items.

Receivables are recorded net of an allowance for doubtful accounts. The allowance is based on historical experience and application of the specific identification method. Write-offs of receivables were immaterial for fiscal years 2017, 2016, and 2015.

Merchandise Inventories

Merchandise inventories consist of the following at the end of 2017 and 2016:

	2017				2016
United States	$	7,091			$	6,422
Canada	1,040				1,015
Other International	1,703				1,532
Merchandise inventories	$	9,834			$	8,969

Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels for the year have been determined. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the first-in, first-out (FIFO) basis.

As of September 3, 2017, U.S. merchandise inventories valued at LIFO approximated FIFO after considering the lower of cost or market principle. Due to net deflation, a benefit of $64 and $27 was recorded to merchandise costs in 2016, and 2015, respectively. At the end of 2017 and 2016, the cumulative impact of the LIFO valuation on merchandise inventories was zero and immaterial, respectively.

The Company provides for estimated inventory losses between physical inventory counts as a percentage of net sales, using estimates based on the Company’s experience. The provision is adjusted periodically to reflect actual physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable.

Property and Equipment

Property and equipment are stated at cost. In general, new building additions are classified into components, each with its own estimated useful life, generally five to fifty years for buildings and improvements and three to twenty years for equipment and fixtures. Depreciation and amortization expense is computed using the

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

straight-line method over estimated useful lives or the lease term, if shorter. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any renewals that are reasonably assured at the date the leasehold improvements are made.

The Company capitalizes certain computer software and software development costs incurred in developing or obtaining computer software for internal use. These costs are included in equipment and fixtures and amortized on a straight-line basis over the estimated useful lives of the software, generally three to seven years.

Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change the way an asset functions or that extend the useful life are capitalized. Assets that were removed during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the end of 2017 and 2016 were immaterial.

The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss would be recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group’s fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. There were no impairment charges recognized in 2017 and 2016, and charges were immaterial in 2015 and included in selling, general and administrative expenses in the consolidated statements of income.

Insurance/Self-Insurance Liabilities

The Company is predominantly self-insured, with insurance coverage for certain catastrophic risks, for employee health care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability, and inventory loss. We use different mechanisms including a wholly-owned captive insurance subsidiary (the captive) and participate in a reinsurance program. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. At the end of 2017 and 2016, these insurance liabilities were $1,059 and $1,021 in the aggregate, respectively, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature.

The captive receives direct premiums, which are netted against the Company’s premium costs in selling, general and administrative expenses, in the consolidated statements of income. The captive participates in a reinsurance program that includes other third-party participants. The reinsurance agreement is one year in duration, and new agreements are entered into by each participant at their discretion at the commencement of the next calendar year. The participant agreements and practices of the reinsurance program limit a participating members’ individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company is not relieved of its primary obligation to the policyholders for activity prior to the termination of the annual agreement.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

Derivatives

The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries with functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $637 and $572 at the end of 2017 and 2016, respectively. The Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance that this practice is effective. The contracts are limited to less than one year in duration. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2017 and 2016.

The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2017, 2016, and 2015.

The Company is exposed to fluctuations in prices for the energy it consumes, particularly electricity and natural gas, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales” exception under authoritative guidance and require no mark-to-market adjustment.

Foreign Currency

The functional currencies of the Company’s international subsidiaries are the local currency of the country in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and expenses of the Company’s consolidated foreign operations are translated at average exchange rates prevailing during the year.

The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the accompanying consolidated statements of income. Generally, these include the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their functional currency. Also included are realized foreign-currency gains or losses from settlements of forward foreign-exchange contracts. These items were immaterial for 2017 and resulted in net gains of $38, and $35 for 2016 and 2015, respectively.

Revenue Recognition

The Company generally recognizes sales, which include gross shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from members prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The sales returns reserve is based on an estimate of the net realizable value of merchandise

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

inventories excepted to be returned. Amounts collected from members for sales or value added taxes are recorded on a net basis.

Generally, when Costco is the primary obligor, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, can influence product or service specifications, or has several but not all of these indicators, revenue is recorded on a gross basis. If the Company is not the primary obligor and does not possess other indicators of gross reporting as noted above, it records the net amounts earned, which is reflected in net sales.

The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. The Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $1,000 per year), which can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions, based on historical data. The net reduction in sales was $1,281, $1,172, and $1,128 in 2017, 2016, and 2015, respectively.

Merchandise Costs

Merchandise costs consist of the purchase price of inventory sold, inbound and outbound shipping charges and all costs related to the Company’s depot operations, including freight from depots to selling warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods and certain ancillary departments.

Vendor Consideration

The Company has agreements to receive funds from vendors for coupons and a variety of other programs. These programs are evidenced by signed agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries, benefits and workers’ compensation costs for warehouse employees (other than fresh foods departments and certain ancillary businesses) as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, credit and debit card processing fees, utilities, and stock-based compensation expense, as well as other operating costs incurred to support warehouse operations.

Retirement Plans

The Company's 401(k) Retirement Plan is available to all U.S. employees who have completed 90 days of employment. The plan allows pre-tax deferrals, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for Canadian employees and contributes a percentage of each employee's salary. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans that are not material. Amounts expensed under all plans were $543, $489, and $454 for 2017, 2016, and 2015, respectively, and are included in selling, general and administrative expenses and merchandise costs in the accompanying consolidated statements of income.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

Stock-Based Compensation

Restricted stock units (RSUs) granted to employees generally vest over five years and allow for quarterly vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant date in the event of retirement or voluntary termination. The Company does not reduce stock-based compensation for an estimate of forfeitures, which are inconsequential in light of historical experience and considering the awards vest on a quarterly basis. Actual forfeitures are recognized as they occur.

Compensation expense for all stock-based awards granted is predominantly recognized using the straight-line method over the requisite service period for the entire award. Awards for employees and non-employee directors provide for accelerated vesting of a portion of outstanding shares based on cumulative years of service with the Company. Compensation expense for the accelerated shares is recognized upon achievement of the long-service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the common stock on the measurement date less the present value of the expected dividends forgone during the vesting period.

Stock-based compensation expense is predominantly included in selling, general and administrative expenses in the consolidated statements of income. Certain stock-based compensation costs are capitalized or included in the cost of merchandise. See Note 7 for additional information on the Company’s stock-based compensation plans.

Leases

The Company leases land and/or buildings at warehouses and certain other office and distribution facilities, primarily under operating leases. Operating leases expire at various dates through 2064, with the exception of one lease in the Company’s U.K. subsidiary, which expires in 2151. These leases generally contain one or more of the following options, which the Company can exercise at the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of a third-party purchase offer.

The Company accounts for its lease expense with free rent periods and step-rent provisions on a straight-line basis over the original term of the lease and any extension options that the Company more likely than not expects to exercise, from the date the Company has control of the property. Certain leases provide for periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales volume.

The Company has capital leases for certain warehouse locations, expiring at various dates through 2054. Capital lease assets are included in land and buildings and improvements in the accompanying consolidated balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is included in selling, general and administrative expenses. Capital lease liabilities are recorded at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments and are included in other current liabilities and other liabilities in the accompanying consolidated balance sheets. Interest on these obligations is included in interest expense in the consolidated statements of income.

The Company records an asset and related financing obligation for the estimated construction costs under build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent the Company is involved in the construction of the building or structural improvements or has construction risk prior to commencement of a lease. Upon occupancy, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, it accounts for the arrangement as a financing lease.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

The Company’s asset retirement obligations (ARO) primarily relate to leasehold improvements that at the end of a lease must be removed. These obligations are recorded as a liability with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the leasehold improvements. These liabilities are accreted over time to the projected future value of the obligation using the Company’s incremental borrowing rate. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases were immaterial at the end of 2017 and 2016, respectively, and are included in other liabilities in the accompanying consolidated balance sheets.

Preopening Expenses

Preopening expenses related to new warehouses, new regional offices and other startup operations are expensed as incurred.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized.

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes as appropriate. Certain of the Company's cumulative foreign undistributed earnings were considered by the Company to be indefinitely reinvested as of September 3, 2017. These earnings would be subject to U.S. income tax if the Company changed its position and could result in a U.S. tax liability. Although the Company has historically asserted that certain non-U.S. undistributed earnings will be permanently reinvested, it may repatriate such earnings to the extent it can do so without an adverse tax consequence. See Note 8 for additional information.

Net Income per Common Share Attributable to Costco

The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs and the “if converted” method for the convertible note securities.

Stock Repurchase Programs

Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 6 for additional information.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition of revenue from contracts with customers. The guidance converges the requirements for reporting revenue and requires disclosures of the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Transition is permitted either retrospectively or as a cumulative effect adjustment as of the date of adoption. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2019.

The Company continues to review current accounting policies, business processes, systems and controls to evaluate the impacts of applying the new standard. Based on its preliminary assessment, the Company believes the new guidance will change recognition timing and classification of cash card breakage income to reflect the historical pattern of gift card redemption rather than the current methodology of recognizing income when redemption is considered remote. The Company will also present estimated sales returns on a gross basis rather than net of the sales return reserve on the consolidated balance sheets. The Company continues to evaluate various areas such as gross versus net revenue presentation for certain contracts, identification and treatment of performance obligations associated with membership offers, and accounting for warranty arrangements on qualified purchases. Management continues to evaluate potential impacts on the contracts associated with the co-branded credit card arrangement as well as its adoption methodology.

In February 2016, the FASB issued new guidance on leases, which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than twelve months. The standard is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2020. While the Company continues to evaluate this standard and the effect on related disclosures, the primary effect of adoption will be to require recording right-of-use assets and corresponding lease obligations for current operating leases. The adoption is expected to have a material impact on the Company's consolidated balance sheets, but not on the consolidated statements of income or consolidated statements of cash flows.

In March 2016, the FASB issued new guidance on stock compensation, intended to simplify accounting for share-based payment transactions. The guidance makes several modifications related to the accounting for income taxes, forfeitures, and minimum statutory tax withholding requirements. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2018. Adoption of this guidance will likely be material to the provision for income taxes and earnings per share amounts on the Company’s consolidated income statements for the change in the recognition of excess tax benefits or deficiencies. Due to the Company's annual vesting and release of shares in its first fiscal quarter, this may create increased volatility in these amounts during that quarter of each fiscal year. Previously these amounts were reflected in equity. Additionally, these amounts will be reflected as cash flows from operations instead of cash flows from financing activities in the consolidated statements of cash flows. Adoption of this guidance is not expected to have a material impact on the consolidated balance sheets, consolidated statements of cash flows, or related disclosures.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 2—Investments

The Company’s investments at the end of 2017 and 2016 were as follows:

2017:	Cost Basis				Unrealized Gains, Net				Recorded Basis
Available-for-sale:
Government and agency securities	$	947			$	0			$	947
Asset and mortgage-backed securities	1				0				1
Total available-for-sale	948				0				948
Held-to-maturity:
Certificates of deposit	285								285
Total short-term investments	$	1,233			$	0			$	1,233

2016:	Cost Basis				Unrealized Gains, Net				Recorded Basis
Available-for-sale:
Government and agency securities	$	1,028			$	6			$	1,034
Asset and mortgage-backed securities	1				0				1
Total available-for-sale	1,029				6				1,035
Held-to-maturity:
Certificates of deposit	306								306
Bankers' acceptances	9								9
Total held-to-maturity	315								315
Total short-term investments	$	1,344			$	6			$	1,350

Gross unrealized gains and losses on available-for-sale securities were not material in 2017, 2016, and 2015. At the end of 2017 and 2015, the Company's available-for-sale securities that were in a continuous unrealized-loss position were not material. The Company had no available-for-sale securities in a continuous unrealized-loss position in 2016. There were no gross unrealized gains and losses on cash equivalents at the end of 2017, 2016, or 2015.

The proceeds from sales of available-for-sale securities were $202, $291, and $246 during 2017, 2016, and 2015, respectively. Gross realized gains or losses from sales of available-for-sale securities were not material in 2017, 2016, and 2015.

The maturities of available-for-sale and held-to-maturity securities at the end of 2017 were as follows:

	Available-For-Sale								Held-To-Maturity
	Cost Basis				Fair Value
Due in one year or less	$	185			$	185			$	285
Due after one year through five years	721				721				0
Due after five years	42				42				0
Total	$	948			$	948			$	285

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 3—Fair Value Measurement

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present information at the end of 2017 and 2016, respectively, regarding the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy reflecting the valuation techniques utilized to determine such fair value.

2017:	Level 1				Level 2
Money market mutual funds(1)	$	7			$	0
Investment in government and agency securities	0				947
Investment in asset and mortgage-backed securities	0				1
Forward foreign-exchange contracts, in asset position(2)	0				2
Forward foreign-exchange contracts, in (liability) position(2)	0				(8		)
Total	$	7			$	942

2016:	Level 1				Level 2
Money market mutual funds(1)	$	222			$	0
Investment in government and agency securities	0				1,034
Investment in asset and mortgage-backed securities	0				1
Forward foreign-exchange contracts, in asset position(2)	0				11
Forward foreign-exchange contracts, in (liability) position(2)	0				(13		)
Total	$	222			$	1,033

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(1)	Included in cash and cash equivalents in the accompanying consolidated balance sheets.

(2)	The asset and the liability values are included in other current assets and other current liabilities, respectively, in the accompanying consolidated balance sheets. See Note 1 for additional information on derivative instruments.

During and at the end of both 2017 and 2016, the Company did not hold any Level 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level 1 or 2 during 2017 and 2016.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Financial assets measured at fair value on a nonrecurring basis include held-to-maturity investments that are carried at amortized cost and are not remeasured to fair value on a recurring basis. There were no fair value adjustments to these financial assets during 2017 and 2016. See Note 4 for the fair value of long-term debt.

Nonfinancial assets measured at fair value on a nonrecurring basis include items such as long-lived assets that are measured at fair value resulting from an impairment, if deemed necessary. There were no fair value adjustments to nonfinancial assets during 2017 and 2016.

Note 4—Debt

Short-Term Borrowings

The Company enters into various short-term bank credit facilities, which increased to $833 in 2017 from $429 in 2016 due to the addition of a $400 revolving line of credit in the U.S. which expires June 2018. At the end of 2017 and 2016, there were no outstanding borrowings under these credit facilities.

In 2017, short term borrowings were immaterial. In 2016, the average and maximum short term borrowings in Japan were $99 and $110, respectively, and had a weighted average interest rate of 0.52% during the year. All other short term borrowings during the year were immaterial.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 4—Debt (Continued)

Long-Term Debt

The Company's long-term debt consists primarily of Senior Notes that have various principal balances, interest rates, and maturity dates as described below. In May 2017, the Company issued $3,800 in aggregate principal amount of Senior Notes, with maturity dates between May 2021 and May 2027. In February 2015 and December 2012, the Company issued $1,000 and $3,500 in aggregate principal amount of Senior Notes, respectively.

In June 2017, the Company paid the outstanding $1,100 principal balance and accrued interest on the 1.125% Senior Notes through proceeds from the Senior Notes issued in May 2017 and existing sources of cash and cash equivalents and short-term investments. In March 2017, the Company paid the outstanding $1,100 principal balance and interest on the 5.5% Senior Notes with existing sources of cash and cash equivalents and short-term investments.

The Company, at its option, may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon certain events, as defined by the terms of the Senior Notes, the holder has the right to require the Company to purchase this security at a price of 101% of the principal amount plus accrued and unpaid interest to the date of the event. Interest on all outstanding long-term debt is payable semi-annually.

The estimated fair value of Senior Notes is valued using Level 2 inputs. Other long-term debt consists primarily of promissory notes and term loans issued by the Company's Japanese subsidiary and are valued primarily using Level 3 inputs. The carrying value and estimated fair value of long-term debt at the end of 2017 and 2016 consisted of the following:

	2017								2016
	Carrying Value				Fair Value				Carrying Value				Fair Value
5.5% Senior Notes due March 2017	$	0			$	0			$	1,100			$	1,129
1.125% Senior Notes due December 2017	0				0				1,099				1,103
1.7% Senior Notes due December 2019	1,198				1,201				1,196				1,219
1.75% Senior Notes due February 2020	498				501				498				508
2.15% Senior Notes due May 2021	994				1,007				0				0
2.25% Senior Notes due February 2022	497				504				497				512
2.30% Senior Notes due May 2022	793				805				0				0
2.75% Senior Notes due May 2024	991				1,010				0				0
3.00% Senior Notes due May 2027	986				1,009				0				0
Other long-term debt	702				716				771				803
Total long-term debt	6,659				6,753				5,161				5,274
Less current portion	86								1,100
Long-term debt, excluding current portion	$	6,573							$	4,061

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 4—Debt (Continued)

Maturities of long-term debt during the next five fiscal years and thereafter are as follows:

2018	$	86
2019	91
2020	1,700
2021	1,091
2022	1,300
Thereafter	2,436
Total	$	6,704

Note 5—Leases

Operating Leases

The aggregate rental expense for 2017, 2016, and 2015 was $258, $250, and $252, respectively. Sub-lease income and contingent rent was not material in 2017, 2016, or 2015.

Capital and Build-to-Suit Leases

Gross assets recorded under capital and build-to-suit leases were $404 and $392 at the end of 2017 and 2016, respectively. These assets are recorded net of accumulated amortization of $78 and $63 at the end of 2017 and 2016, respectively.

At the end of 2017, future minimum payments, net of sub-lease income of $112 for all years combined, under non-cancelable operating leases with terms of at least one year and capital leases were as follows:

	Operating Leases				Capital Leases(1)
2018	$	216			$	32
2019	223				32
2020	206				33
2021	177				33
2022	168				33
Thereafter	2,123				582
Total	$	3,113			745
Less amount representing interest					(365		)
Net present value of minimum lease payments					380
Less current installments(2)					(7		)
Long-term capital lease obligations less current installments(3)					$	373

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(1)	Includes build-to-suit lease obligations.

(2)	Included in other current liabilities in the accompanying consolidated balance sheets.

(3)	Included in other liabilities in the accompanying consolidated balance sheets.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 6—Stockholders’ Equity

Dividends

The Company’s current quarterly dividend rate is $0.50 per share. In May 2017 and February 2015, the Company paid special cash dividends of $7.00 and $5.00 per share, respectively. The aggregate payment was approximately $3,100 and $2,201, respectively.

Stock Repurchase Programs

The Company’s stock repurchase program is conducted under a $4,000 authorization by the Board of Directors, approved on April 17, 2015, which expires April 17, 2019. This authorization revoked previously authorized but unused amounts, totaling $2,528. As of the end of 2017, the remaining amount available for stock repurchases under the approved plan was $2,749. The following table summarizes the Company’s stock repurchase activity:

	Shares Repurchased (000’s)			Average Price per Share				Total Cost
2017	2,998			$	157.87			$	473
2016	3,184			149.90				477
2015	3,456			142.87				494

These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year.

Note 7—Stock-Based Compensation Plans

The Company grants stock-based compensation primarily to employees and non-employee directors. Since 2009, RSU grants to all executive officers have been performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. RSUs held by employees and non-employee directors are subject to quarterly vesting upon retirement or voluntary termination. Employees who attain certain years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date rather than upon retirement. The Seventh Restated 2002 Stock Incentive Plan (Seventh Plan), amended in the second quarter of fiscal 2015, is the Company’s only stock-based compensation plan with shares available for grant at the end of 2017. Each share issued in respect of stock awards is counted as 1.75 shares toward the limit of shares made available under the Seventh Plan. The Seventh Plan authorized the issuance of 23,500,000 shares (13,429,000 RSUs) of common stock for future grants in addition to the shares authorized under the previous plan. The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares equal to the minimum statutory withholding taxes.

As required by the Company's Seventh Plan, in conjunction with the 2017 special cash dividend, the number of shares subject to outstanding RSUs was increased on the dividend record date to preserve their value. The outstanding RSUs were adjusted by multiplying the number of outstanding shares by a factor of 1.032, representing the ratio of the NASDAQ closing price of $180.20 on May 5, 2017, which was the last trading day immediately prior to the ex-dividend date, to the NASDAQ opening price of $174.66 on the ex-dividend date, May 8, 2017. The outstanding RSUs increased by approximately 247,000 and this adjustment did not result in additional stock-based compensation expense, as the fair value of the awards did not change. As further required by the Seventh Plan, the maximum number of shares issuable under the Seventh Plan was proportionally adjusted, which resulted in an additional 364,000 RSU shares available to be granted.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 7—Stock-Based Compensation Plans (Continued)

Summary of Restricted Stock Unit Activity

RSUs granted to employees and to non-employee directors generally vest over five years and three years, respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more years and five or more years of service with the Company, respectively, and provide for vesting upon retirement or voluntary termination. Recipients are not entitled to vote or receive dividends on non-vested and undelivered shares. At the end of 2017, 11,780,000 shares were available to be granted as RSUs under the Seventh Plan.

The following awards were outstanding at the end of 2017:

•	7,798,000 time-based RSUs that vest upon continued employment over specified periods of time;

•	401,000 performance-based RSUs, of which 259,000 were granted to executive officers subject to the certification of the attainment of specified performance targets for 2017. This certification occurred in October 2017, at which time a portion vested as a result of the long service of all executive officers. The remaining awards vest upon continued employment over specified periods of time.

The following table summarizes RSU transactions during 2017:

	Number of Units (in 000’s)			Weighted-Average Grant Date Fair Value
Outstanding at the end of 2016	8,326			$	120.56
Granted	3,856			144.12
Vested and delivered	(4,026	)		119.46
Forfeited	(204	)		129.87
Special cash dividend	247			N/A
Outstanding at the end of 2017	8,199			$	128.15

The weighted-average grant date fair value of RSUs granted was $144.12, $153.46, and $125.68 in 2017, 2016, and 2015, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2017 was $694 and the weighted-average period of time over which this cost will be recognized is 1.6 years. Included in the outstanding balance at the end of 2017 were approximately 2,782,000 RSUs vested but not yet delivered.

Summary of Stock-Based Compensation

The following table summarizes stock-based compensation expense and the related tax benefits under the Company’s plans:

	2017				2016				2015
Stock-based compensation expense before income taxes	$	514			$	459			$	394
Less recognized income tax benefit	(167		)		(150		)		(131		)
Stock-based compensation expense, net of income taxes	$	347			$	309			$	263

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 8—Income Taxes

Income before income taxes is comprised of the following:

	2017				2016				2015
Domestic	$	2,988			$	2,622			$	2,574
Foreign	1,051				997				1,030
Total	$	4,039			$	3,619			$	3,604

The provisions for income taxes for 2017, 2016, and 2015 are as follows:

	2017				2016				2015
Federal:
Current	$	802			$	468			$	766
Deferred	7				233				(12		)
Total federal	809				701				754
State:
Current	161				108				131
Deferred	8				21				1
Total state	169				129				132
Foreign:
Current	389				398				399
Deferred	(42		)		15				(90		)
Total foreign	347				413				309
Total provision for income taxes	$	1,325			$	1,243			$	1,195

Tax benefits associated with the release of employee RSUs were allocated to equity attributable to Costco in the amount of $37, $74, and $86, in 2017, 2016, and 2015, respectively.

The reconciliation between the statutory tax rate and the effective rate for 2017, 2016, and 2015 is as follows:

	2017							2016							2015
Federal taxes at statutory rate	$	1,414			35.0	%		$	1,267			35.0	%		$	1,262			35.0	%
State taxes, net	116				2.9			91				2.5			85				2.3
Foreign taxes, net	(64		)		(1.6	)		(21		)		(0.6	)		(125		)		(3.5	)
Employee stock ownership plan (ESOP)	(104		)		(2.6	)		(17		)		(0.5	)		(66		)		(1.8	)
Other	(37		)		(0.9	)		(77		)		(2.1	)		39				1.2
Total	$	1,325			32.8	%		$	1,243			34.3	%		$	1,195			33.2	%

The Company’s provision for income taxes in 2017 and 2015 was favorably impacted by net tax benefits of $104 and $68, respectfully, primarily due to tax benefits recorded in connection with the May 2017 and February 2015 special cash dividends paid by the Company to employees through the Company's 401(k) Retirement Plan of $82 and $57, respectively. Dividends on these shares are deductible for U.S. income tax purposes.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 8—Income Taxes (Continued)

The components of the deferred tax assets (liabilities) are as follows:

	2017				2016
Equity compensation	$	109			$	99
Deferred income/membership fees	167				177
Accrued liabilities and reserves	647				601
Other(1)	18				63
Property and equipment	(747		)		(779		)
Merchandise inventories	(252		)		(256		)
Net deferred tax (liabilities)/assets	$	(58	)		$	(95	)

---

(1)	Includes foreign tax credits of $36 and $78 for 2017 and 2016, respectively, which will expire beginning in 2025.

The deferred tax accounts at the end of 2017 and 2016 include non-current deferred income tax assets of $254 and $202, respectively, included in other assets; and non-current deferred income tax liabilities of $312 and $297, respectively, included in other liabilities.

During 2015, the Company repatriated a portion of the earnings in the Canadian operations that, in 2014, the Company determined were no longer considered indefinitely reinvested. In the fourth quarter of 2015, the Company changed its position regarding an additional portion of the undistributed earnings of the Canadian operations, which are no longer considered indefinitely reinvested. These earnings were distributed in 2016. Current exchange rates compared to historical rates when these earnings were generated resulted in an immaterial U.S. benefit, which was recorded at the end of 2015. During 2017, the Company changed its position regarding an additional portion of the undistributed earnings of its Canadian operations as they could be repatriated without adverse tax consequences. Accordingly, that portion is no longer considered to be indefinitely reinvested. Subsequent to the end of the fiscal year, the Company repatriated a portion of undistributed earnings in its Canadian operations without adverse tax consequences.

The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of $3,176 and $3,280 at the end of 2017 and 2016, respectively, of certain non-U.S. consolidated subsidiaries because the earnings have not been repatriated, or subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings, if repatriated would not result in an adverse tax consequence. Because of the availability of U.S. foreign tax credits and complexity of the computation, it is not practicable to determine at this time the U.S. federal income tax liability that would be associated with such earnings if such earnings were not deemed to be indefinitely reinvested. Deferred taxes are recorded for earnings of foreign operations when it is determined that such earnings are no longer indefinitely reinvested.

The Company believes that its U.S. current and projected asset position is sufficient to meet its U.S. liquidity requirements and has no current plans to repatriate for use in the U.S. the cash and cash equivalents and short-term investments held by these non-U.S. subsidiaries whose earnings are considered indefinitely reinvested.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 8—Income Taxes (Continued)

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2017 and 2016 is as follows:

	2017				2016
Gross unrecognized tax benefit at beginning of year	$	52			$	158
Gross increases—current year tax positions	3				2
Gross increases—tax positions in prior years	17				1
Gross decreases—tax positions in prior years	0				(47		)
Settlements	(11		)		(25		)
Lapse of statute of limitations	(9		)		(37		)
Gross unrecognized tax benefit at end of year	$	52			$	52

The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2017 and 2016, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $29 and $46 at the end of 2017 and 2016, respectively.

Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized by the Company were not material in 2017 or 2016. Accrued interest and penalties were not material at the end of 2017 or 2016.

The Company is currently under audit by several taxing jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months.

The Company files income tax returns in the United States, various state and local jurisdictions, in Canada and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2014. The Company is currently subject to examination in Canada for fiscal years 2013 to present and in California for fiscal years 2007 to present. No other examinations are believed to be material.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 9—Net Income per Common and Common Equivalent Share

The following table shows the amounts used in computing net income per share and the effect on net income and the weighted average number of shares of potentially dilutive common shares outstanding (shares in 000’s):

	2017				2016				2015
Net income available to common stockholders after assumed conversions of dilutive securities	$	2,679			$	2,350			$	2,377
Weighted average number of common shares used in basic net income per common share	438,437				438,585				439,455
RSUs	2,493				2,668				3,249
Conversion of convertible notes	7				10				12
Weighted average number of common shares and dilutive potential of common stock used in diluted net income per share	440,937				441,263				442,716

Note 10—Commitments and Contingencies

Legal Proceedings

The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded an immaterial accrual with respect to one matter described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties.

The Company is a defendant in the following matters, among others:

Numerous putative class actions have been brought around the United States against motor fuel retailers, including the Company, alleging that they have been overcharging consumers by selling gasoline or diesel that is warmer than 60 degrees without adjusting the volume sold to compensate for heat-related expansion or disclosing the effect of such expansion on the energy equivalent received by the consumer. The Company is named in the following actions: Raphael Sagalyn, et al., v. Chevron USA, Inc., et al., Case No. 07-430 (D. Md.); Phyllis Lerner, et al., v. Costco Wholesale Corporation, et al., Case No. 07-1216 (C.D. Cal.); Linda A. Williams, et al., v. BP Corporation North America, Inc., et al., Case No. 07-179 (M.D. Ala.); James Graham, et al. v. Chevron USA, Inc., et al., Civil Action No. 07-193 (E.D. Va.); Betty A. Delgado, et al., v. Allsups, Convenience Stores, Inc., et al., Case No. 07-202 (D.N.M.); Gary Kohut, et al. v. Chevron USA, Inc., et al., Case No. 07-285 (D. Nev.); Mark Rushing, et al., v. Alon USA, Inc., et al., Case No. 06-7621 (N.D. Cal.); James Vanderbilt, et al., v. BP Corporation North America, Inc., et al., Case No. 06-1052 (W.D. Mo.); Zachary Wilson, et al., v. Ampride, Inc., et al., Case No. 06-2582 (D. Kan.); Diane Foster, et al., v. BP North America Petroleum, Inc., et al., Case No. 07-02059 (W.D. Tenn.); Mara Redstone, et al., v. Chevron USA, Inc., et al., Case No. 07-20751 (S.D. Fla.); Fred Aguirre, et al. v. BP West Coast Products LLC, et al., Case No. 07-1534

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 10—Commitments and Contingencies (Continued)

(N.D. Cal.); J.C. Wash, et al., v. Chevron USA, Inc., et al.; Case No. 4:07cv37 (E.D. Mo.); Jonathan Charles Conlin, et al., v. Chevron USA, Inc., et al.; Case No. 07 0317 (M.D. Tenn.); William Barker, et al. v. Chevron USA, Inc., et al.; Case No. 07-cv-00293 (D.N.M.); Melissa J. Couch, et al. v. BP Products North America, Inc., et al., Case No. 07cv291 (E.D. Tex.); S. Garrett Cook, Jr., et al., v. Hess Corporation, et al., Case No. 07cv750 (M.D. Ala.); Jeff Jenkins, et al. v. Amoco Oil Company, et al., Case No. 07-cv-00661 (D. Utah); and Mark Wyatt, et al., v. B. P. America Corp., et al., Case No. 07-1754 (S.D. Cal.). On June 18, 2007, the Judicial Panel on Multidistrict Litigation assigned the action, entitled In re Motor Fuel Temperature Sales Practices Litigation, MDL Docket No 1840, to Judge Kathryn Vratil in the United States District Court for the District of Kansas. On April 12, 2009, the Company agreed to settle the actions in which it is named as a defendant. Under the settlement, the Company agreed, to the extent allowed by law and subject to other terms and conditions in the agreement, to install over five years from the effective date of the settlement temperature-correcting dispensers in the States of Alabama, Arizona, California, Florida, Georgia, Kentucky, Nevada, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Utah, and Virginia. Other than payments to class representatives, the settlement did not provide for cash payments to class members. On September 22, 2011, the court preliminarily approved a revised settlement, which did not materially alter the terms. On April 24, 2012, the court granted final approval of the revised settlement. Plaintiffs moved for an award of $10 in attorneys’ fees, as well as an award of costs and payments to class representatives. A report and recommendation was issued in favor of a fee award of $4. On August 24, 2016, the district court affirmed the report and recommendation. On March 20, 2014, the Company filed a notice invoking a “most favored nation” provision under the settlement, under which it sought to adopt provisions in later settlements with certain other defendants. The motion was denied on January 23, 2015. Final judgment was entered on September 22, 2015, which was affirmed by the court of appeals in August 2017.

A class action alleging violation of California Wage Order 7-2001 by failing to provide seating to member service assistants who act as greeters and exit attendants in the Company’s California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:13-cv-03598, N.D. Cal. filed July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees. The Company has filed an answer denying the material allegations of the complaint.

The Company received notices from most states stating that they have appointed an agent to conduct an examination of the books and records of the Company to determine whether it has complied with state unclaimed property laws. In addition to seeking the turnover of unclaimed property subject to escheat laws, the states may seek interest, penalties, costs of examinations, and other relief. The agent appears to have concluded its examination, without seeking payments from the Company. Certain states have separately also made requests for payment by the Company concerning a specific type of property, some of which have been paid in immaterial amounts.

The Company received from the Drug Enforcement Administration subpoenas and administrative inspection warrants concerning the Company's fulfillment of prescriptions related to controlled substances and related practices. As previously disclosed, the Company entered into a settlement agreement in January 2017 under which it paid $12 to the Department of Justice, an amount for which a previous accrual was made.

On November 23, 2016, the Company’s Canadian subsidiary received from the Ontario Ministry of Health and Long Term Care a request for an inspection and information concerning compliance with the anti-rebate provisions in the Ontario Drug Benefit Act and the Drug Interchangeability and Dispensing Fee Act. The Company is seeking to cooperate with the request.

In November 2016 and September 2017, the Company received notices of violation from the Connecticut Department of Energy and Environmental Protection regarding hazardous waste practices at its Connecticut warehouses, primarily concerning unsalable pharmaceuticals. The Company is seeking to cooperate concerning the resolution of these notices.

The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position; however, it is possible

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 10—Commitments and Contingencies (Continued)

that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter.

Note 11—Segment Reporting

The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Australia, Spain, Iceland, and France and through majority-owned subsidiaries in Taiwan and Korea. The Company’s reportable segments are largely based on management’s organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are as described in Note 1. All material inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, incurred on behalf of the Company's Canadian and Other International operations, but are included in the U.S. operations because those costs are not allocated internally and generally come under the responsibility of U.S. management.

	United States Operations				Canadian Operations				Other International Operations				Total
2017
Total revenue	$	93,889			$	18,775			$	16,361			$	129,025
Operating income	2,644				841				626				4,111
Depreciation and amortization	1,044				124				202				1,370
Additions to property and equipment	1,714				277				511				2,502
Net property and equipment	12,339				1,820				4,002				18,161
Total assets	24,068				4,471				7,808				36,347
2016
Total revenue	$	86,579			$	17,028			$	15,112			$	118,719
Operating income	2,326				778				568				3,672
Depreciation and amortization	946				109				200				1,255
Additions to property and equipment	1,823				299				527				2,649
Net property and equipment	11,745				1,628				3,670				17,043
Total assets	22,511				3,480				7,172				33,163
2015
Total revenue	$	84,351			$	17,341			$	14,507			$	116,199
Operating income	2,308				771				545				3,624
Depreciation and amortization	848				119				160				1,127
Additions to property and equipment	1,574				148				671				2,393
Net property and equipment	10,815				1,381				3,205				15,401
Total assets	22,988				3,608				6,421				33,017

The following table summarizes the percentage of net sales by merchandise category:

	2017			2016			2015
Foods	21	%		22	%		22	%
Sundries	20	%		21	%		21	%
Hardlines	16	%		16	%		16	%
Fresh Foods	14	%		14	%		14	%
Softlines	12	%		12	%		11	%
Ancillary	17	%		15	%		16	%

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 12—Quarterly Financial Data (Unaudited)

The two tables that follow reflect the unaudited quarterly results of operations for 2017 and 2016.

	53 Weeks Ended September 3, 2017
	First Quarter (12 Weeks)				Second Quarter (12 Weeks)				Third Quarter (12 Weeks)				Fourth Quarter (17 Weeks)				Total (53 Weeks)
REVENUE
Net sales	$	27,469			$	29,130			$	28,216			$	41,357			$	126,172
Membership fees	630				636				644				943				2,853
Total revenue	28,099				29,766				28,860				42,300				129,025
OPERATING EXPENSES
Merchandise costs	24,288				25,927				24,970				36,697				111,882
Selling, general and administrative	2,940				2,980				2,907				4,123				12,950
Preopening expenses	22				15				15				30				82
Operating income	849				844				968				1,450				4,111
OTHER INCOME (EXPENSE)
Interest expense	(29		)		(31		)		(21		)		(53		)		(134		)
Interest income and other, net	26				(4		)		18				22				62
INCOME BEFORE INCOME TAXES	846				809				965				1,419				4,039
Provision for income taxes	291				288				259			(1)	487				1,325
Net income including noncontrolling interests	555				521				706				932				2,714
Net income attributable to noncontrolling interests	(10		)		(6		)		(6		)		(13		)		(35		)
NET INCOME ATTRIBUTABLE TO COSTCO	$	545			$	515			$	700			$	919			$	2,679
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
Basic	$	1.24			$	1.17			$	1.59			$	2.10			$	6.11
Diluted	$	1.24			$	1.17			$	1.59			$	2.08			$	6.08
Shares used in calculation (000’s)
Basic	438,007				439,127				438,817				437,987				438,437
Diluted	440,525				440,657				441,056				441,036				440,937
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.45			$	0.45			$	7.50		(2)	$	0.50			$	8.90

---

(1)	Includes an $82 tax benefit recorded in the third quarter in connection with the special cash dividend paid to employees through the Company's 401(k) Retirement Plan.

(2)	Includes the special cash dividend of $7.00 per share paid in May 2017.

COSTCO WHOLESALE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data) (Continued)

Note 12—Quarterly Financial Data (Unaudited) (Continued)

	52 Weeks Ended August 28, 2016
	First Quarter (12 Weeks)				Second Quarter (12 Weeks)				Third Quarter (12 Weeks)				Fourth Quarter (16 Weeks)				Total (52 Weeks)
REVENUE
Net sales	$	26,627			$	27,567			$	26,151			$	35,728			$	116,073
Membership fees	593				603				618				832				2,646
Total revenue	27,220				28,170				26,769				36,560				118,719
OPERATING EXPENSES
Merchandise costs	23,621				24,469				23,162				31,649				102,901
Selling, general and administrative	2,806				2,835				2,731				3,696				12,068
Preopening expenses	26				10				18				24				78
Operating income	767				856				858				1,191				3,672
OTHER INCOME (EXPENSE)
Interest expense	(33		)		(31		)		(30		)		(39		)		(133		)
Interest income and other, net	28				16				7				29				80
INCOME BEFORE INCOME TAXES	762				841				835				1,181				3,619
Provision for income taxes	275				286				286				396				1,243
Net income including noncontrolling interests	487				555				549				785				2,376
Net income attributable to noncontrolling interests	(7		)		(9		)		(4		)		(6		)		(26		)
NET INCOME ATTRIBUTABLE TO COSTCO	$	480			$	546			$	545			$	779			$	2,350
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
Basic	$	1.10			$	1.24			$	1.24			$	1.78			$	5.36
Diluted	$	1.09			$	1.24			$	1.24			$	1.77			$	5.33
Shares used in calculation (000’s)
Basic	438,342				439,648				438,815				437,809				438,585
Diluted	441,386				441,559				441,066				440,868				441,263
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.40			$	0.40			$	0.45			$	0.45			$	1.70