Question

Statement of Cash Flows (Indirect Method)
The Rainbow Company's income statement and comparative balance sheets as of December 31 of 2013 and 2012 follow:

RAINBOW COMPANY Income Statement For the Year Ended December 31, 2013
Sales Revenue		$825,000
Dividend Income		16,500
		841,500
Cost of Goods Sold	$484,000
Wages and Other Operating Expenses	143,000
Depreciation Expense	42,900
Patent Amortization Expense	7,700
Interest Expense	14,300
Income Tax Expense	48,400
Loss on Sale of Equipment	5,500
Gain on Sale of Investments	(11,000)	734,800
Net Income		$106,700

RAINBOW COMPANY Balance Sheets
	Dec. 31, 2013	Dec. 31, 2012
Assets
Cash and Cash Equivalents	$20,900	$27,500
Accounts Receivable	44,000	33,000
Inventory	113,300	84,700
Prepaid Expenses	11,000	6,600
Long-term Investments-Available for Sale	-	55,000
Fair Value Adjustment to Investments	-	7,700
Land	209,000	110,000
Buildings	489,500	385,000
Accumulated Depreciation - Buildings	(100,100)	(82,500)
Equipment	196,900	247,500
Accumulated Depreciation-Equipment	(46,200)	(50,600)
Patents	55,000	35,200
Total Assets	$993,300	$859,100
Liabilities and Stockholders' Equity
Accounts Payable	$22,000	$17,600
Interest Payable	6,600	5,500
Income Tax Payable	8,800	11,000
Bonds Payable	170,500	137,500
Preferred Stock ($100 par value)	110,000	82,500
Common Stock ($5 par value)	416,900	400,400
Paid-in-capital in Excess of Par Value-Common	146,300	136,400
Retained Earnings	112,200	60,500
Unrealized Gain on Investments	-	7,700
Total Liabilities and Stockholders' Equity	$993,300	$859,100

During the year, the following transactions occurred:
1. Sold long-term investments costing $55,000 for $66,000 cash. Unrealized gains totaling $7,700 related to these investments had been recorded in earlier years. At year-end, the fair value adjustment and unrealized gain account balances were eliminated.
2. Purchased land for cash.
3. Capitalized an expenditure made to improve the building.
4. Sold equipment for $15,400 cash that originally cost $50,600 and had $29,700 accumulated depreciation.
5. Issued bonds payable at face value for cash.
6. Acquired a patent with a fair value of $27,500 by issuing 275 shares of preferred stock at par value.
7. Declared and paid a $55,000 cash dividend.
8. Issued 3,300 shares of common stock for cash at $8 per share.
9. Recorded depreciation of $17,600 on buildings and $25,300 on equipment.

Required
a. Calculate the change in cash and cash equivalents that occurred during 2013.
b. Prepare a statement of cash flows using the indirect method.

a. Change in Cash during 2013 $Answer AnswerIncreaseDecrease

b. Use a negative sign with cash outflow answers.

RAINBOW COMPANY Statement of Cash Flows For Year Ended December 31, 2013
Cash Flow from Operating Activities
Net Income		Answer
Add (deduct) items to convert net income to cash basis
Depreciation		Answer
Patent Amortization		Answer
Loss on Sale of Equipment		Answer
Gain on Sale of Investments		Answer
Accounts Receivable	AnswerIncreaseDecrease	Answer
Inventory	AnswerIncreaseDecrease	Answer
Prepaid Expenses	AnswerIncreaseDecrease	Answer
Accounts Payable	AnswerIncreaseDecrease	Answer
Interest Payable	AnswerIncreaseDecrease	Answer
Income Tax Payable	AnswerIncreaseDecrease	Answer
Cash Flow Provided by Operating Activities		Answer
Cash Flow from Investing Activities
Sale of Investments		Answer
Purchase of Land		Answer
Improvements to Building		Answer
Sale of equipment		Answer
Cash Used by Investing Activities		Answer
Cash Flow from Financing Activities
Issuance of Bonds Payable		Answer
Issuance of Common Stock		Answer
Payment of Dividends		Answer
Cash Provided by Financing Activities		Answer
Net Change in Cash		Answer
Cashat Beginning of Year		Answer
Cashat End of Year		Answer

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Answer 1

a. Change in Cash during 2013 $ 6,600 Decrease

b

RAINBOW COMPANY
Statement of Cash flows
For the Year Ended December 31, 2013
Cash flows from operating activities
Net Income		$   106,700
Adjustments to reconcile net income to ;
Depreciation		$      42,900
Patent Amortization		$        7,700
Loss on Sale of Equipment		$        5,500
Gain on Sale of Investments		$   (11,000)
Accounts Receivable	Increase	$   (11,000)
Inventory	Increase	$   (28,600)
Prepaid Expenses	Increase	$      (4,400)
Accounts Payable	Increase	$        4,400
Interest Payable	Increase	$        1,100
Income Tax Payable	Decrease	$      (2,200)
Net cash provided by operating activities		$   111,100
Cash flows from investing activities
Sale of Investments		$      66,000
Purchase of Land		$   (99,000)
Improvements to Building		$ (104,500)
Sale of equipment		$      15,400
Net cash used by investing activities		$ (122,100)
Cash flows from financing activities
Issuance of Bonds Payable		$      33,000
Issuance of Common Stock		$      26,400
Payment of Dividends		$   (55,000)
Net cash provided by financing activities		$        4,400
Net decrease in cash		$      (6,600)
Cash and cash equivalents at beginning of period		$      27,500
Cash and cash equivalents at end of period		$      20,900

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