Question
The 2011 annual report of Wal-Mart, a major retailing company, listed the following property and equipment ($ in millions): Property and equipment, at cost $148,584
The 2011 annual report of Wal-Mart, a major retailing company, listed the following property and equipment ($ 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 million):
Revenues | $421,849 |
Expenses | (396,307) |
Operating income | $25,542 |
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 ($396,307-$7,641)= $388,666.
Table for Problem ($ amount in millions)
1. Zero Income Taxes | 1. Zero Income Taxes | 2. 40% Income Taxes | 2. 40% Income Taxes | |
Straight-Line Depreciation | Accelerated Depreciation | Straight-Line Depreciation | Accelerated 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. Walmart uses straight line depreciation. If accelerated depreciation had been used, assume that depreciation would have been $9,641 million. Assume zero income taxes. Fill in the first two columns of the blanks in the accompanying table ($ in millions).
2. Fill in the last two columns of blanks in the above table. Assume an income tax rate of 40%. Assume also that Walmart 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 cash? Explain as precisely as possible.
4. Refer to requirement 2, Assume that Walmart had used straight-line depreciation for reporting to shareholders and to income tax authorities. Indicate the change (increase and decrease and amount) in the following balances if Walmart has 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 Walmart increased depreciation by an extra $2,750 million under both straight-line and accelerated methods. How would cash be affected? Be specific.
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