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		$1,125,000
	Dividend Income		22,500
	Total Revenue		1,147,500
	Cost of Goods Sold	$660,000
	Wages and Other Operating Expenses	195,000
	Depreciation Expense	58,500
	Patent Amortization Expense	10,500
	Interest Expense	19,500
	Income Tax Expense	66,000
	Loss on Sale of Equipment	7,500
	Gain on Sale of Investments	(4,500)	1,012,500
	Net Income		$135,000

RAINBOW COMPANY Balance Sheets
		December 31, 2016	December 31, 2015
	Assets
	Cash and Cash Equivalents	$28,500	$37,500
	Accounts Receivable	60,000	45,000
	Inventory	154,500	115,500
	Prepaid Expenses	15,000	9,000
	Long-Term Investments	-	85,500
	Land	285,000	150,000
	Buildings	667,500	525,000
	Accumulated Depreciation-Buildings	(136,500)	(112,500)
	Equipment	268,500	337,500
	Accumulated depreciation-Equipment	(63,000)	(69,000)
	Patents	75,000	48,000
	Total Assets	$1,354,500	$1,171,500
	Liabilities and Stockholders' Equity
	Accounts Payable	$30,000	$24,000
	Interest Payable	9,000	7,500
	Income Tax Payable	12,000	15,000
	Bonds Payable	232,500	187,500
	Preferred Stock ($100 par value)	150,000	112,500
	Common Stock ($5 par value)	568,500	546,000
	Paid-in capital in excess of par value-Common	199,500	186,000
	Retained Earnings	153,000	93,000
	Total Liabilities and Stockholders' Equity	$1,354,500	$1,171,500

During 2016, the following transactions and events occurred:

1		Sold long-term investments costing $85,500 for $90,000 cash.
2		Purchased land for cash.
3		Capitalized an expenditure made to improve the building.
4		Sold equipment for $21,000 cash that originally cost $69,000 and had $40,500 accumulated depreciation.
5		Issued bonds payable at face value for cash.
6		Acquired a patent with a fair value of $37,500 by issuing 375 shares of preferred stock at par value.
7		Declared and paid a $75,000 cash dividend.
8		Issued 4,500 shares of common stock for cash at $8 per share.
9		Recorded depreciation of $24,000 on buildings and $34,500 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
	Cash received as dividends
	Cash paid for merchandise purchased
	Cash paid for wages and other operating expenses
	Cash paid for interest
	Cash paid for income taxes
	Net cash from operating activities
	Cash flows from investing activities
	Sale of investments
	Patent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance
	Improvements to building
	Sale of equipment
	Net cash from investing activities
	Cash flows from financing activities
	Patent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance
	Issuance of common stock
	Payment of dividends
	Net cash from financing activities
	Patent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance
	Patent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance
	Ending cash balance

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
	Patent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance
	Add (deduct) items to convert net income to cash basis
	Depreciation
	Patent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance
	Loss on sale of equipment
	Gain on sale of investments
	Accounts receivable increase
	Inventory increase
	Prepaid expenses increase
	Accounts payable increase
	Interest payable increase
	Income tax payable decrease
	Net cash provided by operating activities
(2) Schedule of noncash investing and financing activities:
	Patent amortizationIssuance of preferred stock to acquire patentIssuance of bonds payableNet incomeNet change in cashPurchase of landBeginning cash balance

Answer 1

a.

Cash and Cash Equivalents, December 31, 2016	28500
Cash and Cash Equivalents, December 31, 2015	37500
Cash decrease during 2016	9000

b.

RAINBOW COMPANY
STATEMENT OF CASH FLOWS (DIRECT METHOD)
FOR YEAR ENDED DECEMBER 31, 2016
Cash Flows from operating activities
Cash received from customers	1110000
Cash received as dividends	22500
Cash paid for merchandise purchased	-693000
Cash paid for wages and other operating expenses	-201000
Cash paid for interest	-18000
Cash paid for income taxes	-69000
Net cash from operating activities		151500
Cash Flows from investing activities
Sale of investments	90000
Purchase of land	-135000
Improvements to building	-142500
Sale of equipment	21000
Net cash from investing activities		-166500
Cash Flows from financing activities
Issuance of bonds payable	45000
Issuance of common stock (4500 x $8)	36000
Payment of dividends	-75000
Net cash from financing activities		6000
Net change in cash		-9000
Beginning cash balance		37500
Ending cash balance		28500

Workings:

Cash receipts from customers
Sales Revenue	1125000
Less: Increase in Accounts Receivable	-15000
	1110000
Cash paid for merchandise purchased
Cost of goods sold	660000
Add: Increase in Inventory	39000
Less: Increase in Accounts Payable	-6000
	693000
Cash paid for wages and other operating expenses
Wages and other operating expenses	195000
Add: Increase in prepaid expenses	6000
	201000
Cash paid for interest
Interest expense	19500
Less: Increase in Interest Payable	-1500
	18000
Cash paid for income taxes
Income tax expense	66000
Add: Decrease Income tax payable	3000
	69000

c.

(1) Supplemental Cash Flow Disclosures
Cash Paid for Interest	18000
Cash Paid for Income Taxes	69000
(2) Schedule of Noncash Investing and Financing Activities
Issuance of Preferred Stock to acquire Patent	37500

Note: The format provided for c(1) is incorrect. Kindly fill appropriately in the required format since the same has not been given with the question.