Accounting Theories: Costco Wholesale Corporation

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Question :



Topic:  Identify and apply accounting theories and models in accounting to a Corporation of your choice (with approval granted by lecturers and tutors).  You are required to demonstrate your understanding of the chosen accounting theories to matters current to the corporation of choice.
Task Details: Group task - Groups are to identify and analyse current theories and models in accounting, analysing how they apply to the given situation. Specific research supported recommendations need to be provided.

Research Requirements: Students need to support their analysis with reference from the text and a minimum of ten (10) suitable, reliable, current and academically acceptable sources – check with your tutor if unsure of the validity of sources.

Include minimum 15 references.

Please also include couple of paragraphs including the company’s CSR, GRI(Global Reporting Initiative) and couple of issues that company has faced in the past.

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Answer :

Accounting Theories:  Costco Wholesale Corporation 

Executive summary 

The importance of financial accounting is very vital for a business organization as it helps in recording the financial transactions undertaken by the company in a particular financial year. It is important for management to understand the importance of financial accounting and provide adequate resources to this branch. The main purpose of this report is to evaluate a different kind of accounting theories that are being used in a particular business organization. The business organization considered for this project is Costco Wholesale this is one of the largest wholesale organizations in the world. The main focus of this report would be on stakeholder theory and legitimacy theory. This report will discuss how these theories are being used by management of Costco wholesale. In addition to that this report will be also be focused on other issues that are being faced by the organization and current business operations. Impact of these issues on the business operations will also be discussed in brief. This report will also be discussed with the concept of corporate social responsibility and its importance to the business operations of Costco wholesale. The concept of global reporting initiative will also be discussed in these reports along with its relevance to the Costco wholesale Limited.

Brief information about the company

Costco wholesale Limited is one of the largest wholesale organizations in the world. Over the period of time, it has appointed numerous trolls all across the world publishing a large network for providing a different kind of product and services to the customer. It is a multinational organization which was first established in the United States of America. This company was started in 1976 and it is estimated that as of August 2018 there are around 759 warehouses of this organization in more than 10 countries (Courtemanche and Carden, 2014). This organization has also opened online platforms for its customers which has also increase the overall revenue and profitability of the company. It is giving competition to other online vendors that are performing well in the market. In the majority of industries, Costco wholesale has been dominating the other competitors. The main reason behind the competitive advantage of this organization is the availability of higher resources due to which company is able to undercut all the other organization operating in the industry. 

Stakeholder theory

Stakeholder theory is an accounting theory that focuses on the involvement of all the stakeholders involved in the business operations. A stakeholder can be defined as the person or organization that is directly or indirectly involved in the business operations of a particular company (Wiebe, Distasio and Shirtliffe, 2016). For example, the government can be considered as an external stakeholder because it is very interested in the profits earned by the company during a particular financial year as the main source of revenue for government is a collection of tax from business organizations. Similarly, there are other stakeholders that have specific and different requirements from the business organization. It is important to consider and fulfill these requirements as the stakeholders are contributing significantly towards the business operations. For example, without the cooperation from the government, it is not possible for Costco wholesale to operate in the market. There is a different kind of licenses and permits that are required to be collected from the government by the business organization. 

Stakeholder theory is focused on maintaining an effective and efficient relationship with all the important and critical stakeholders involved in the business operation (Jones, Wicks and Freeman, 2017). This relationship helps in increasing the productivity and efficiency of the business operations which has a direct impact on the profitability of the company. Examples of stakeholder theory adopted by the company can be evaluated with the help of the following two examples-

Relationship with employees

Costco wholesale Limited is always known for providing the best working environment to its customers. This can be evaluated by comparing the labor turnover ratio of Costco wholesale from other business organization operating in this industry. Generally, the turnover ratio in the case of business organizations operating in the supermarket industry is very high because people are doing these jobs only on a part-time basis. As of 2010 employee turnover rate in case of Costco wholesale was around 11% whereas the same rate in case of Walmart and Sam's club was near 44% (Jensen, 2017). It clearly shows that the work environment provided by Costco wholesale is much better as compared to other competitors. Another important factor that leads to lower turnover ratio is that salary and compensation provided by Costco wholesale are much better as compared to other organizations. As of 2012 company was providing an hourly rate of $17 where is Walmart was providing Payment rate of $10.3 to its customer. Management of Costco limited has openly criticized the other business organizations that are providing lower wages to its employees on a regular interval of time. one of the important objectives of the organization culture established by Costco wholesale is to make sure that employee is motivated so maximum efficiency of human resource capital can be achieved.

Relationship with the customers

The customer is one of the most essential stakeholders in the organization as existence and profitability of the company is totally dependent on the behavior of the customer towards the product and services offered by the company. Costco wholesale Limited understand the importance of maintaining an effective and efficient relationship with the customer and it has been providing effective and efficient services towards the customer (Chiu and Wang, 2015). The quality of product and services offered by the company are also superior as compared to other competitors in the market which is one of the reasons that it has been able to attain customer loyalty over the period of time. Generally, prices offered by the company for product and services is lower as compared to other competitors in the market due to economies of scale. Customer loyalty can be estimated from the factor that the total number of registered member of the organization has increased from 58,000,000 in 2010 to 67,000,000 in 2012 (Mitchell, 2015). The company has also started an annual membership for which every customer is required to pay $45 every financial year. Despite this annual fee company was able to retain around 86% of total members in 2015 when this scheme was started. 

On the basis of this example that can be said that all the stakeholders are in properly managed by the organization. The main purpose of the stakeholder theory is to make sure that each and every stakeholder involved in the business operation is getting necessary information and returned from the business organization. After considering the profitability and popularity of the company in the market it can be said that stakeholders of the company are properly satisfied with the business activities. It is suggested that the management of the company should also focus on shareholders rather than focusing is specifically on employees and customers. It is true that employees and customers are very important for executing business operations but investors are also very important for getting money for business expansion.

Legitimacy theory

Legitimacy theory has been associated with the business operations for a long period of time by different researchers and authors. The basic definition of legitimacy theory is that legitimacy can be defined as the socially constructed system of values and beliefs that have taken a state of rule and regulation among the business industry. One of the best example to define legitimacy theory is rules and regulations in relation to corporate social responsibility. According to the concept of Corporate Social Responsibility, it is important for a business organization to repay for growth and development of society as it has been using the resources of the society. Over the period of time, each and every business organization that is operating on a larger scale is doing corporate social responsibility activities whether they are required to do so according to the law applicable to them (Deegan, 2014). It can be said the concept of legitimacy theory is applying in case of Corporate Social Responsibility activities as belief and values of some organization has been converted into rules and regulations over the period of time.

Legitimacy theory plays a very important role in providing financial and non-financial information to the business stakeholders. This theory helps in explaining the behavior of the organization in implementing and executing the socially responsible policies. Every business organization operating in this industry is providing such information through internet financial reporting framework (Killian and O'Regan, 2016). In this type of financial reporting Framework, all the information in relation to a particular topic or activity undertaken by the organization is published on the internet through the official website of the company. Management of Costco wholesale has been conducting corporate social responsibility every financial year for a long period of time and formal reports are all the preparation for the recording of all these activities (Fernando and Lawrence, 2014). Corporate social responsibility report of the company can be extracted from this link

It can be said that the concept of legitimacy theory has been properly included in the financial reporting framework of the company. The financial and managerial accounting department has been considering the legitimacy theory which results in the publishing of all the financial and non-financial data that is relevant to four stakeholders that are involved in the business operation. All the financial data can be extracted from the financial reports prepared by the company at the end of every financial year. In addition to that non-financial information can also be extracted from the annual reports or the official website of the company.

In the current business environment, the main purpose of using legitimacy theory by business organizations is to show the socially responsible attitude of the company and contributions made tour development and growth of the society. This type of reporting on part of the company helps in getting the attention of the customers and it also acts as a promotional advertisement campaign (Chauvey, 2015). Overall revenue and profitability of the company can be increased with the help of promoting the social responsibility activities undertaken by the organization.

Global reporting initiative 

Global reporting initiative is an independent and standardization Organization that helps Government and business organization all across the globe to understand and communicate the sustainability issues in relation to climate change, human rights, social development, environmental protection etc. main objective of this organization is to make sure that business organizations are also focused on conserving the resources while performing their business activities. This type of organization is very important for all the business organization as this type of organizations helps in providing a direction to the business operations which can be helpful in continuation of business for a long period of time as it will help in resource conservation (Global Reporting Initiative, 2013). If a business organizations continue to operate without considering the impact on the environment then over the period of time there will be no natural resources and business organizations will not be able to operate effectively in such environment.

This organization is responsible for establishing GRI sustainability reporting standards. These standards were established in 1997 and over the period of time many standards have been altered and added according to the changes in the business environment. Since its establishment around 93% of the largest 250 companies in the world has adopted these rules and regulations. It is expected that over the period of time more and more business organizations will be adopting these standards including small and medium-sized organizations. This is one of the most essential steps that is required to be taken by every business organization operating in the world for the conservation of natural resources.

Corporate social responsibility by Costco wholesale

The primary objective behind corporate social responsibility is that business organizations should be responsible towards the society and execute their functions accordingly. It is important for business organizations to understand the importance of conservation of resources and growth of society (Duff, 2016). Growth and development of society will definitely have a positive impact on the economic condition of the people living in the society which will ultimately help in increasing the profitability and revenue of the company.

Management of Costco Wholesale Corporation has established corporate governance guidelines for each of the member of the company especially the board of directors. In this code of conduct rules and regulations are prepared by the organization that helps the business organization to contribute to society. Costco Wholesale Corporation has been working positively towards the growth and development of the society. For example, in the year 2017, it has pledged an amount of $25 million for improvement of Child Health Care in the country (Mousa and Hassan, 2015). This type of expenditures is being conducted by the organization regularly as part of their corporate social responsibility.

Recommendation and Conclusion 

After evaluating the whole report it can be said that the financial reporting framework of Costco Wholesale Corporation is very effective and providing all the necessary information to the stakeholders of the company. Financial accounting of the company has been using stakeholder theory as well as legitimacy theory for providing necessary information to its customers and other stakeholders. One factor that should be considered by the organization while using stakeholder theory is to focus on all the stakeholders rather than focusing on some of the very critical stakeholders such as a customer and employees. Management of Costco Wholesale Corporation should also focus on other stakeholders by conducting proper stakeholder analysis of the business operation (Barkemeyer, Preuss and Lee, 2015). The stakeholder analysis will help in identifying all the critical stakeholders and their requirements from the business organization. A stakeholder analysis will definitely improve the manner in which stakeholder theory has been integrated with the financial accounting. Reporting requirements of different stakeholders can be achieved more efficiently with the help of such analysis. 

Corporate social responsibility report of the companies also not very efficient as the company has not provided an early corporate social responsibility statement on the official website of the company. Publishing of Corporate Social Responsibility statement on the official website of the company can be a very effective method of advertisement and promotion. It is suggested that management of the company should to publish corporate social responsibility statement and corporate sustainability statement on their official website. In addition to that, the rules, regulations, and standards maintained by the global reporting initiative organization should be adopted by Costco Wholesale Corporation. This will help in the preservation of the environment to which will be a most essential and critical requirement in future.  

On the basis of this report, it can be concluded that financial reporting framework of the organization is effective and efficient but there are some deficiencies that should be worked upon by the organization. This report has successfully identified integration of accounting theories in accounting framework of Costco Wholesale Corporation i.e. stakeholder theory and legitimacy theory. Both of these theories are incorporated in the accounting framework of the company but there is a requirement for further improvement which is provided in the recommendation section of the report.