Carrefour is the worlds second-largest retailer, just behind Wal-Mart. Carrefour operates more than 9,500 stores in four different grocery store formats: hypermarkets, supermarkets, cash &

Carrefour is the world’s second-largest retailer, just behind Wal-Mart. Carrefour operates more than 9,500 stores in four different grocery store formats: hypermarkets, supermarkets, cash & carry, and convenience. While headquartered in France, over 57% of the company’s sales are made in other countries. The company’s 2010 annual report showed the following balances (€ in millions):

Revenues ............. € 89,325

Operating expenses ......... (87,489)

Operating income ......... € 1,836

Carrefour had depreciation expense of €1,633 million (included in operating expenses). The company’s ending cash balance was €3,271 million.

Carrefour reported its property and equipment (called tangible fixed assets by Carrefour) in the following way (€ in millions):

Gross tangible fixed assets ........ €33,726

Less: Accumulated depreciation ..... 18,429

Net tangible fixed assets ........ €15,297

For purposes of this problem, assume all revenues and expenses, excluding depreciation, are for cash. Also, you may round all values computed in the table to the nearest million euros.

1. Carrefour used straight-line depreciation. If accelerated depreciation had been used, assume that depreciation would have been €2,363 million. Assume zero income taxes. Fill in the first two columns of blanks in the accompanying table (in millions of euros).
2. Fill in the last two columns of blanks in the table above. Assume an income tax rate of 60%. Assume also that Carrefour 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. Carrefour 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 Carrefour 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 depreciation under both straight-line and accelerated methods. How would this affect cash? Bespecific.

1. Zero Income Taxes 2. 60% 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