Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

8-62 Depreciation, Income Taxes, and Cash Flow (Alternates are 8-61 and 8-63.) The 2011 annual report of Wal-Mart, a Major retailing company listed the following

8-62 Depreciation, Income Taxes, and Cash Flow

(Alternates are 8-61 and 8-63.) The 2011 annual report of Wal-Mart, a Major retailing company listed the following property and equipment ($in Millions):

Property and equipment, at cost $148, 584

Less: Accumulated depreciation $43, 486

Property and equipment, net $105,098

The cash balance was $7,395 million. Depreciation expense during the year was $7,641 million. The condensed income statement follows ($ in millions):

Revenues $421,849

Expenses 396, 307

Operating Income $25,542

For the purposes of this problem, assume that all revenues and expenses, including depreciation, are for cash. Thus cash operating expenses in millions of dollars were ($396,307-$7,641) = $388,666.

Table for Problem 8-62

($ amounts in millions)

1. Zero Income Taxes 2. 40% Income Taxes

Straight-Line Accelerated 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 $___________ $____________ $___________ $__________

  1. Wal-Mart uses straight-line depreciation. If accelerated depreciation had been used, assume that depreciation would have been $9,641 million. Assume zero income taxes. Fill in the first two columns of blanks in the accompanying table ($ in millions).

  1. Fill in the last two columns of blanks in the table above. 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.

  1. Compare your answers to requirements 1 and 2. Does depreciation provide cash? Explain as precisely as possible.

  1. Refer to requirement 2. Assume that Walmart-had used straight-line depreciation for reporting to shareholders and to income 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?

  1. Refer to requirement 1 where there are zero taxes. Suppose Wal-Mart increased depreciation by extra $2,750 million under both straight-line and accelerated methods. How would cash be affected? Be Specific.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Accounting questions

Question

Understand the types and uses of public relations.

Answered: 1 week ago