Question

1. Financial Statement Analysis Cases

Carrefour Group

Carrefour Group (FRA), the top retailer in Europe (second worldwide), recently had €108.629 billion in sales. It has more than 495,000 employees worldwide, with operations in 31 countries. It is the seventh largest employer worldwide, with 15,430 stores. Carrefour provided the following information in a recent annual report related to its property and equipment.

Carrefour Group

(in millions)

Notes to the Financial Statements (in part)

(3) Tangible fixed assets

In accordance with IAS 16 “Tangible Fixed Assets,” land, buildings, equipment, fixtures and fittings are valued at their cost price at acquisition, or at production cost less depreciation and loss in value. The cost of borrowing is not included in the acquisition price of fixed assets. Tangible fixed assets in progress are posted at cost less any identified loss in value. Depreciation of these assets begins when the assets are ready for use. Tangible fixed assets are depreciated on a straight-line basis according to the following average useful lives: Construction: Buildings 40 years Grounds 10 years Car parks 6-and-two-thirds years Equipment, fixtures, fittings and installations 6-and-two-thirds years to 8 years Other fixed assets 4 to 10 years

Note 8: Depreciation, amortization and provisions Current Year Prior Year Change Depreciation of tangible fixed assets €1,623 €1,484 9.4%

Note 15: Tangible fixed assets

Current Year Prior Year Land €  2,913  €  2,934  Buildings    9,838     9,628  Equipment, fixtures, fittings and installations   14,006    13,219  Other fixed assets    1,159     1,148  Fixed assets in progress      769       790  Leased land, buildings, fixtures    1,717     1,720  Gross tangible fixed assets   30,402    29,439  Accumulated Depreciation  (15,333)  (14,486) Impairment     (260)     (202) Net tangible fixed assets € 14,809  € 14,751

Cash Provided by Operations

(euros in millions) Current Year Prior Year Cash provided by operations €4,887  €3,912  Capital expenditures  2,918   3,069  Cash provided by operations as a percent of capital expenditures  167%  127%

Instructions

a. What method of depreciation does Carrefour use?

b. Does depreciation and amortization expense cause cash flow from operations to increase? Explain.

c. What do the schedule of cash flow measures indicate?

Answer 1

Solution:

a)From the Notes to the financial statements we can fnd that Carrefour uses the straight line method to depreciate the assets.

b)Depreciation and amortization is tax deductible expense.Since depreciation and amortization is non-cash expense and it reduces the tax expense hence it causes the cash flow from operations to increase.

For example,Cash flow before depreciation and tax is $10,000 and tax rate is 35%.Depreciation and amortization is $2000.Now,Calculate the cash flow from operation :

Cash flow from Operation=(Cash flow before depreciation and Tax-Depreciation)*(1-tax Rate)+Depreciation

=($10,000-$2000)(1-0.35)+$2000=$7200

Now without depreciation,cash flow from operation is;

=(Cash flow before depreciation and Tax-Depreciation)*(1-tax Rate)+Depreciation

=($10,000-$0)(1-0.35)+0=$6500

c)The schedule of cash flow measures indicates that cash provided by operations is expected to cover capital expenditures over the next few years,even as expansion continues to accelaerate.Cash flow measures are meaningful indicators of growth and financial strength,when evaluated in the context of absolute dollar or percentages.