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
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 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.


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).
2. 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.
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 $2,750 million under both straight-line and accelerated methods. How would cash be affected? Bespecific.


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  • CreatedFebruary 20, 2015
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