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

(a)        Carrefour used the straight-line method for depreciating its tangible fixed assets.

(b)        Depreciation and amortization charges do not increase cash flow from operations. In a cash flow statement, these two items are often added back to net income to arrive at cash flow from operations and therefore some incorrectly conclude these expenses increase cash flow. What affects cash flow from operations are cash revenues and cash expenses. Noncash charges have no effect, except for positive tax savings generated by these charges.

(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 accelerate. It is obvious that Carrefour’s believes that cash flow measures are meaningful indicators of growth and financial strength, when evaluated in the context of absolute dollars or percentages.