Depreciation, Income Taxes, and Cash Flow (Alternates are 8-62 and 8-63.) The French auto company, eugen firen, sells the majority of its cars outside France. The company's annual report showed the following balances (euros in millions): Revenues Operating expenses Operating income 50,288 (47,884) 2,404 PSA Peugeot Citroen had depreciation expense of 1,974 million (included in operating expenses). The company's ending cash balance was 7,666 million. PSA Peugeot Citroen reported its property and equipment in the following way (in millions): Property, plant, and equipment, at cost Less: Accumulated depreciation Net property and equipment 28,691 17,230 11,461 For purposes of this problem, assume all revenues and expenses, excluding depreciation, are for cash.

Table for Problem 8-64 (Amounts in millions of Euros) Straight-Line 1. Zero Income Taxes Accelerated 2. 60% Income Taxes Straight-Line Accelerated Depreciation Depreciation Depreciation 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 e 1. PSA Peugeot Citroen used straight-line depreciation. If accelerated depreciation had been used, depreciation would have been 2,474 million. Assume zero income taxes. Fill in the blanks in the accompanying table (in millions of euros). 2. Repeat requirement 1, but assume an income tax rate of 60%. Assume also that PSA Peugeot Citroen 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 pre- cisely as possible. 4. Refer to requirement 2. PSA Peugeot Citroen 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 PSA Peugeot Citroen had used accelerated depreciation for shareholder and tax reporting instead of straight-line: 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 the company had doubled its depreci- ation under both straight-line and accelerated methods. How would this affect cash? Be specific.