Question

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		$1,500,000
	Dividend Income		30,000
	Total Revenue		1,530,000
	Cost of Goods Sold	$880,000
	Wages and Other Operating Expenses	260,000
	Depreciation Expense	78,000
	Patent Amortization Expense	14,000
	Interest Expense	26,000
	Income Tax Expense	88,000
	Loss on Sale of Equipment	10,000
	Gain on Sale of Investments	(6,000)	1,350,000
	Net Income		$180,000

RAINBOW COMPANY Balance Sheets
		December 31, 2016	December 31, 2015
	Assets
	Cash and Cash Equivalents	$48,000	$50,000
	Accounts Receivable	80,000	60,000
	Inventory	206,000	154,000
	Prepaid Expenses	20,000	12,000
	Long-Term Investments	-	114,000
	Land	380,000	200,000
	Buildings	890,000	700,000
	Accumulated Depreciation-Buildings	(182,000)	(150,000)
	Equipment	358,000	450,000
	Accumulated depreciation-Equipment	(84,000)	(92,000)
	Patents	100,000	64,000
	Total Assets	$1,816,000	$1,562,000
	Liabilities and Stockholders’ Equity
	Accounts Payable	$50,000	$32,000
	Interest Payable	12,000	10,000
	Income Tax Payable	16,000	20,000
	Bonds Payable	310,000	250,000
	Preferred Stock ($100 par value)	200,000	150,000
	Common Stock ($5 par value)	758,000	728,000
	Paid-in capital in excess of par value-Common	266,000	248,000
	Retained Earnings	204,000	124,000
	Total Liabilities and Stockholders’ Equity	$1,816,000	$1,562,000

During 2016, the following transactions and events occurred:

1		Sold long-term investments costing $114,000 for $120,000 cash.
2		Purchased land for cash.
3		Capitalized an expenditure made to improve the building.
4		Sold equipment for $28,000 cash that originally cost $92,000 and had $54,000 accumulated depreciation.
5		Issued bonds payable at face value for cash.
6		Acquired a patent with a fair value of $50,000 by issuing 500 shares of preferred stock at par value.
7		Declared and paid a $100,000 cash dividend.
8		Issued 6,000 shares of common stock for cash at $8 per share.
9		Recorded depreciation of $32,000 on buildings and $46,000 on equipment.

• part a.
• part b.
• part c.
• part d.

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

Answer 1

RAINBOW COMPANY
Statement of Cash Flows
For the year ended December 31, 2016
Cash flows from Operating Activities	$	$
Net Income		180,000
Adjustments to reconcile net income to net cash provided by operations
Depreciation expense	78,000
Patent Amortization Expense	14,000
Gain on sale of investing activities	-6,000
Loss on sale of equipment	10,000
Change in operating current assets and liabilities other than cash
Increase in Accounts Receivable	-20,000
Increase in Inventory	-52,000
Increase in Prepaid expenses	-8,000
Increase in Accounts Payable	18,000
Increase in Interest Payable	2,000
Decrease in Income Tax Payable	-4,000
		32,000
Net cash provided by Operating Activities		212,000
Cash Flows from Investing Activities
Sale of investments	120,000
Expense on building	-190,000
Purchase of Land	-180,000
Sale of equipment	28,000
Net cash used in Investing Activities		-222,000
Cash Flows from Financing Activities
Proceeds from issuance of shares	48,000
Proceeds from issuance of bonds	60,000
Payment of dividends	-100,000
Net cash flows from Financing Activities		8,000
Net increase in cash		-2,000
Beginning cash balance		50,000
Ending cash balance		48,000

Non Cash Investing and Financing
Purchase of patent in lieu of shares $ 50,000