Question
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 $___________ $____________ $___________ $__________
- 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).
- 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.
- Compare your answers to requirements 1 and 2. Does depreciation provide cash? Explain as precisely as possible.
- 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?
- 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.
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