Lesson 7 of 8
Making it balance
The plug is not a fudge if it is a financing decision. Costco's fiscal 2025 balance sheet closes at 77,099 million, and a model that misses it is talking.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- One balancing item, and it is a financing decision: excess cash accumulates, or a revolver is drawn.
- The test is the balance sheet identity, and Costco's closes at 77,099 million dollars of total assets against 47,935 million of total liabilities at 31 August 2025.
- A model that will not balance has an asset or a liability that nothing paid for, and the size of the gap usually names the mistake.
Every forecast produces a balance sheet that does not close, because the forecast decided what the business earns and spends without deciding how the difference is funded. Closing it is the last step, and it is a decision rather than an adjustment.
The identity the model has to reproduce
| Line | 31 August 2025 | 1 September 2024 |
|---|---|---|
| Total current assets | 38,380 | 34,246 |
| Property and equipment, net | 31,909 | 29,032 |
| Operating lease right-of-use assets | 2,725 | 2,617 |
| Other long-term assets | 4,085 | 3,936 |
| Total assets | 77,099 | 69,831 |
| Total current liabilities | 37,108 | 35,464 |
| Long-term debt, excluding current portion | 5,713 | 5,794 |
| Long-term operating lease liabilities | 2,460 | 2,375 |
| Other long-term liabilities | 2,654 | 2,576 |
| Total liabilities | 47,935 | 46,209 |
One plug, and it has a name
A model needs exactly one balancing item, and it should be the line a treasurer would actually move. In practice that is a revolving credit facility on one side and a cash balance on the other.
The rule is simple. Run the cash flow statement to a closing cash figure. If that figure is above the minimum operating cash the business needs, the excess stays in cash. If it is below, the revolver is drawn by the difference, and the draw carries interest in the next period.
That is a plug in the mechanical sense and it is not a fudge, because it represents something a company does. A plug placed in other long-term assets, or in retained earnings, represents nothing.
What a failure to balance is telling you
The identity cannot fail if every movement was recorded twice. So when the model does not close, a movement was recorded once, and the size of the gap is usually enough to identify it.
A gap equal to the year's depreciation means the charge reduced the asset base without being added back in the cash flow statement. A gap equal to dividends means retained earnings was rolled forward without them. A gap equal to a working capital movement means a balance changed without the corresponding cash effect. A gap equal to capital spending means the asset schedule and the investing section disagree.
The check to run on every forecast year
Total assets less total liabilities less equity equals zero, in every forecast period, not just the first. A model that balances in year one and drifts by year five has an error that scales, which is almost always a schedule where the opening balance of one year is not the closing balance of the last.
At Costco the two published totals give shareholders' equity as the residual: 77,099 less 47,935 is 29,164 million dollars at 31 August 2025. That figure is arithmetic on two disclosed totals, and reproducing it is the first thing a model of this company has to do before anything it says about the future is worth reading.
Check yourself
What should the single balancing item in a model be?
- Other long-term assets
- A financing line a treasurer would actually move: excess cash on one side, a drawn revolver on the other
- Retained earnings
Show the answer
Answer: B.
A plug is legitimate when it represents a real decision. Placing it in an asset or equity line represents nothing and hides the error it absorbs.A forecast balance sheet is out by exactly the depreciation charge. What is the likely cause?
- The tax rate is wrong
- Depreciation reduced the asset base without being added back in the cash flow statement
- Dividends were forecast twice
Show the answer
Answer: B.
Every movement is recorded twice. A gap equal to a named figure identifies which movement was recorded once.Why check the identity in every forecast year rather than the first?
- Because the first year uses actuals
- Because an error where one year's opening balance is not the previous year's closing balance grows with each period
- Because interest is only computed after year one
Show the answer
Answer: B.
A model that balances early and drifts later has a linking error in a schedule, and the drift is the symptom.Sources
- Costco Wholesale Corporation, Form 10-K for the fiscal year ended 31 August 2025, filed 2025-10-08, accession 0000909832-25-000101: the consolidated balance sheets.
What this leaves out
- Shareholders' equity of 29,164 million dollars is this course's subtraction of two disclosed totals, not a line quoted from the filing.
- The gap table uses Costco's filed figures as labels for the size of an error in a hypothetical model. It describes no error in any filing.
- Nothing here is a view on Costco or on any security.