Depreciation, Income Taxes, and Cash Flow (Alternates are 8-62 and 8-64.) A recent annual report of Wal-Mart, a major retailing company, listed the following property and equipment including leaseholds ($ in millions): Property and equipment, at cost Less: Accumulated depreciation Property and equipment, net The cash balance was $2,758 million. $ 67,051 15,147 $51,904 Depreciation expense during the year was $3,432 million. The condensed income statement fol- lows ($ in millions): Revenues Expenses Operating income $246,525 232,881 $ 13,644 For purposes of this problem, assume that all revenues and expenses, excluding depreciation, are for cash. Thus, cash operating expenses in millions of dollars were $232,881 - $3,432 = $229,449.

Table for Problem 8-63 ($ Amounts in Millions) 1. Zero Income Taxes 2. 40% Income Taxes Accelerated Straight-Line Accelerated Depreciation Depreciation Depreciation Straight-Line Depreciation $ $ $ Revenues (all cash) Cash operating expenses Cash provided by operations before income taxes Depreciation expense Pretax income Income tax expense Net income Supplementary analysis Cash provided by operations before income taxes Income tax payments $ Net cash provided by operations $ $ 1. Wal-Mart uses straight-line depreciation. If accelerated depreciation had been used, depreciation would have been $5,432. Assume zero income taxes. Fill in the blanks in the accompanying table ($ in millions). 2. Repeat requirement 1, but assume an income tax rate of 40%. Assume also that Wal-Mart uses the same depreciation method for reporting to shareholders and to income tax authorities 3. Compare your answers to requirements 1 and 2. Does depreciation provide cash? Explain as precisely as possible.

4. Refer to requirement 2. Assume that Wal-Mart had used straight-line depreciation for reporting to shareholders and to income tax authorities. Indicate the change (increase or decrease and amount) in the following balances if Wal-Mart had used accelerated depreciation for shareholder and tax reporting instead of straight-line during that year: Cash, Accumulated Depreciation, Pretax Income, Income Tax Expense, and Retained Earnings. What would be the new balances in Cash and Accumulated Depreciation? 5. Refer to requirement 1 where there are zero taxes. Suppose Wal-Mart increased depreciation by an extra $2,500 million under both straight-line and accelerated methods. How would cash be affected? Be specific.