In: Accounting
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 |
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---|---|---|---|
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 |
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---|---|---|
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 |
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 |