Question

Preparing a Statement of Cash Flows (Direct Method)

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

RAINBOW COMPANY Income Statement For Year Ended December 31, 2016
	Sales		$3,375,000
	Dividend Income		67,500
	Total Revenue		3,442,500
	Cost of Goods Sold	$1,980,000
	Wages and Other Operating Expenses	585,000
	Depreciation Expense	175,500
	Patent Amortization Expense	31,500
	Interest Expense	58,500
	Income Tax Expense	198,000
	Loss on Sale of Equipment	22,500
	Gain on Sale of Investments	(13,500)	3,037,500
	Net Income		$405,000

RAINBOW COMPANY Balance Sheets
		December 31, 2016	December 31, 2015
	Assets
	Cash and Cash Equivalents	$85,500	$112,500
	Accounts Receivable	180,000	135,000
	Inventory	463,500	346,500
	Prepaid Expenses	45,000	27,000
	Long-Term Investments	-	256,500
	Land	855,000	450,000
	Buildings	2,002,500	1,575,000
	Accumulated Depreciation-Buildings	(409,500)	(337,500)
	Equipment	805,500	1,012,500
	Accumulated depreciation-Equipment	(189,000)	(207,000)
	Patents	225,000	144,000
	Total Assets	$4,063,500	$3,514,500
	Liabilities and Stockholders' Equity
	Accounts Payable	$90,000	$72,000
	Interest Payable	27,000	22,500
	Income Tax Payable	36,000	45,000
	Bonds Payable	697,500	562,500
	Preferred Stock ($100 par value)	450,000	337,500
	Common Stock ($5 par value)	1,705,500	1,638,000
	Paid-in capital in excess of par value-Common	598,500	558,000
	Retained Earnings	459,000	279,000
	Total Liabilities and Stockholders' Equity	$4,063,500	$3,514,500

During 2016, the following transactions and events occurred:

1		Sold long-term investments costing $256,500 for $270,000 cash.
2		Purchased land for cash.
3		Capitalized an expenditure made to improve the building.
4		Sold equipment for $63,000 cash that originally cost $207,000 and had $121,500 accumulated depreciation.
5		Issued bonds payable at face value for cash.
6		Acquired a patent with a fair value of $112,500 by issuing 1,125 shares of preferred stock at par value.
7		Declared and paid a $225,000 cash dividend.
8		Issued 13,500 shares of common stock for cash at $8 per share.
9		Recorded depreciation of $72,000 on buildings and $103,500 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 direct method. Use one cash outflow for "cash paid for wages and other operating expenses." Accounts payable relate to inventory purchases only.

RAINBOW COMPANY STATEMENT OF CASH FLOWS (Direct Method) FOR YEAR ENDED DECEMBER 31, 2016
	Cash flows from operating activities
	Cash received from customers	Answer
	Cash received as dividends	Answer	Answer
	Cash paid for merchandise purchased	Answer
	Cash paid for wages and other operating expenses	Answer
	Cash paid for interest	Answer
	Cash paid for income taxes	Answer	Answer
	Net cash from operating activities		Answer
	Cash flows from investing activities
	Sale of investments	Answer
	Answer

Answer
	Improvements to building	Answer
	Sale of equipment	Answer
	Net cash from investing activities		Answer
	Cash flows from financing activities
	Answer

Answer
	Issuance of common stock	Answer
	Payment of dividends	Answer
	Net cash from financing activities		Answer
	Answer

	Answer
	Answer

	Answer
	Ending cash balance		Answer

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

(1) Reconciliation of net income to net cash flow from operating activities
	Answer

Answer
	Add (deduct) items to convert net income to cash basis
	Depreciation	Answer
	Answer

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
(2) Schedule of noncash investing and financing activities:
	Answer

Answer

Answer 1

Cash Flow Statement
Indirect Method
Cash Flow from Operating Activities
Net Income		$       405,000.00
Adjustments
Depreciation	$ 175,500.00
Patent Amortization expense	$    31,500.00
Interest Expense	$    58,500.00
Loss on Sale of Equipment	$    22,500.00
Gain on Sale of Investments	$ (13,500.00)
Dividend Income	$ (67,500.00)
Changes in Current Assets/ Current Liabilities
Increase in Accounts Receivable	$ (45,000.00)			=135000-180000
Increase in inventory	$(117,000.00)			=346500-463500
Increase in Prepaid Expenses	$ (18,000.00)			=27000-45000
Increase in Accounts Payable	$    18,000.00			=90000-72000
Decrease in Income Tax Payable	$    (9,000.00)			=36000-45000
Total Adjustments		$         36,000.00
Cash from Operating Activities			$     441,000.00
Cash flow from Investing Activities
Sale of Long term Investment		$       270,000.00
Dividend Income		$         67,500.00
Purchase of Land		$     (405,000.00)		=450000-855000
Improvement to Building		$     (427,500.00)		=1575000-2002500
Sale of Equipment		$         63,000.00
Net cash used In investing activities			$   (432,000.00)
Cash flow from Financing Activities
Issue of Common Stock		$       108,000.00		=13500*8
Issue of Bonds		$       135,000.00		=697500-562500
Interest Paid		$        (54,000.00)		=-(58500+22500-27000)
Dividend Paid		$     (225,000.00)
Net cash used in financing activities			$     (36,000.00)
Increase in Cash			$     (27,000.00)
Opening Balance of Cash			$     112,500.00
Closing Balance of Cash			$       85,500.00

Cash Flow Statement
Direct Method
Cash Flow from Operating Activities
Cash collected from Customers		$    3,330,000.00		=3375000+135000-180000
Cash paid for merchandise purhcased		$ (2,079,000.00)		=-(1980000+72000-90000+463500-346500)
Cash paid for wages and other operating expenses		$     (603,000.00)		=-(585000+45000-27000)
Cash paid for income taxes		$     (207,000.00)		=-(198000+45000-36000)
Cash from Operating Activities			$     441,000.00
Cash flow from Investing Activities
Sale of Long term Investment		$       270,000.00
Dividend Income		$         67,500.00
Purchase of Land		$     (405,000.00)		=450000-855000
Improvement to Building		$     (427,500.00)		=1575000-2002500
Sale of Equipment		$         63,000.00
Net cash used In investing activities			$   (432,000.00)
Cash flow from Financing Activities
Issue of Common Stock		$       108,000.00		=13500*8
Issue of Bonds		$       135,000.00		=697500-562500
Interest Paid		$        (54,000.00)		=-(58500+22500-27000)
Dividend Paid		$     (225,000.00)
Net cash used in financing activities			$     (36,000.00)
Increase in Cash			$     (27,000.00)
Opening Balance of Cash			$     112,500.00
Closing Balance of Cash			$       85,500.00