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? Be specific.

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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 $