Question

In: Accounting

Rainbow Company’s income statement and comparative balance sheets follow.

 

Preparing a Statement of Cash Flows (Indirect Method)

Rainbow Company’s income statement and comparative balance sheets follow.

RAINBOW COMPANY
Income Statement
For Year Ended December 31, 2016
  Sales   $750,000
  Dividend Income   15,000
  Total Revenue   765,000
  Cost of Goods Sold $440,000  
  Wages and Other Operating Expenses 130,000  
  Depreciation Expense 39,000  
  Patent Amortization Expense 7,000  
  Interest Expense 13,000  
  Income Tax Expense 44,000  
  Loss on Sale of Equipment 5,000  
  Gain on Sale of Investments (3,000) 675,000
  Net Income   $90,000
RAINBOW COMPANY
Balance Sheets
    December 31, 2016 December 31, 2015
  Assets    
  Cash and Cash Equivalents $19,000 $25,000
  Accounts Receivable 40,000 30,000
  Inventory 103,000 77,000
  Prepaid Expenses 10,000 6,000
  Long-Term Investments - 57,000
  Land 190,000 100,000
  Buildings 445,000 350,000
  Accumulated Depreciation—Buildings (91,000) (75,000)
  Equipment 179,000 225,000
  Accumulated depreciation—Equipment (42,000) (46,000)
  Patents 50,000 32,000
  Total Assets $903,000 $781,000
  Liabilities and Stockholders’ Equity    
  Accounts Payable $20,000 $16,000
  Interest Payable 6,000 5,000
  Income Tax Payable 8,000 10,000
  Bonds Payable 155,000 125,000
  Preferred Stock ($100 par value) 100,000 75,000
  Common Stock ($5 par value) 379,000 364,000
  Paid-in capital in excess of par value—Common 133,000 124,000
  Retained Earnings 102,000 62,000
  Total Liabilities and Stockholders’ Equity $903,000 $781,000


During 2016, the following transactions and events occurred:

1   Sold long-term investments costing $57,000 for $60,000 cash.
2   Purchased land for cash.
3   Capitalized an expenditure made to improve the building.
4   Sold equipment for $14,000 cash that originally cost $46,000 and had $27,000 accumulated depreciation.
5   Issued bonds payable at face value for cash.
6   Acquired a patent with a fair value of $25,000 by issuing 250 shares of preferred stock at par value.
7   Declared and paid a $50,000 cash dividend.
8   Issued 3,000 shares of common stock for cash at $8 per share.
9   Recorded depreciation of $16,000 on buildings and $23,000 on equipment.

Required

a. Compute the change in cash and cash equivalents that occurred during 2016.
$Answer



b. Prepare a 2016 statement of cash flows using the indirect method.

RAINBOW COMPANY
STATEMENT OF CASH FLOWS
FOR YEAR ENDED DECEMBER 31, 2016
Cash flows from operating activities    
AnswerPatent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance $Answer  
Add (deduct) items to convert net income to cash basis    
Depreciation Answer  
AnswerPatent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance Answer  
Loss on sale of equipment Answer  
Gain on sale of investments Answer  
Accounts receivable increase Answer  
Inventory increase Answer  
Prepaid expenses increase Answer  
Accounts payable increase Answer  
Interest payable increase Answer  
Income tax payable decrease Answer  
Net cash provided by operating activities   Answer
Cash flows from investing activities    
Sale of investments Answer  
AnswerPatent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance Answer  
Improvements to building Answer  
Sale of equipment Answer  
Net cash used by investing activities   Answer
Cash flows from financing activities    
AnswerPatent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance Answer  
Issuance of common stock Answer  
Payment of dividends Answer  
Net cash provided by financing activities   Answer
AnswerPatent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance   Answer
AnswerPatent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landCash and cash equivalents at beginning of year   Answer
Cash and cash equivalents at end of year   Answer


c. Prepare separate schedules showing (1) cash paid for interest and for income taxes and (2) noncash investing and financing transactions.

(1) Supplemental Cash Flow Disclosures    
Cash paid for interest $Answer
Cash paid for income taxes $Answer
(2) Schedule of noncash investing and financing activities:    
AnswerPatent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance $Answer


d. Compute its (1) operating cash flow to current liabilities ratio, (2) operating cash flow to capital expenditures ratio, and (3) free cash flow.
Round your answers to (1) and (2) to two decimal places.

(1) Operating cash flow to current liabilities ratio Answer
(2) Operating cash flow to capital expenditures ratio Answer
(3) Free cash flow $Answer

Solutions

Expert Solution

Requirement Operating cash flow to current liabilities ratio
=operating cash flow/Current Liabilities
=86000/(20000+6000+8000)
2.529411765 Times
Operating cash flow to capital expenditure ratio
=Operating cash flow/Capital expenditure
=86000/(90000+95000)
0.464864865 Times
Free cash flow
=Operating cash flow-Capital expenditure
=86000-(90000+95000)
-99000
Working Notes
Cashflow from Operating activities
Net Income 90000
Add : Depreciation 39000
Add : Amortization 7000
Add : Loss on sale of Equipment 5000
Less : Dividend Income -15000
Less : Gain on sale of Investment -3000
Cash flow before working capital changes 123000
Increase in Accounts Receivable -10000
Increase in prepaid expenses -4000
Increase in inventory -26000
Increase in Accounts Payable 4000
Increase in interest payable 1000
Decrease in income tax payable -2000
Cash flow provided by Operating activities 86000
Cash flow from Investing activities
Purchase of Land -90000
Payment for expenses for building -95000
Dividend income 15000
Sale of Investment 60000
Sale of equipment 14000
Cash used by Investing activities -96000
Cash flow from Financing activities
Payment of cash dividends -50000
Issuance of common stock 24000
Issuance of Bonds 30000
Cash used by Financing activites 4000
Net cash -6000
Add : Beginning Balance 25000
Ending Balance 19000
19000

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