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Preparing a Statement of Cash Flows (Indirect Method) Rainbow Company’s income statement and comparative balance sheets...

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
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
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

I cant figure out free cash flow. I know how to do the rest.

$Answer

Solutions

Expert Solution

a. Compute the change in cash and cash equivalents as follows:
Particulars Amount
Cash and cash equivalents at the end of year 2016 $19,000
Less: Cash and cash equivalents at the beginning of year 2016 $25,000
Decrease in cash and cash equivalents in 2016 ($6,000)
b. Prepare the cashflow statement as flows:
R Inc.,
Cash Flow Statement
For the Year Ended December 31, 2016
Particulars Amount Amount
Cash flow from operating activities:
Net income $90,000
Adjustments to reconcile net income to operating cash flows:
Depreciation expense $39,000
Amortization expense $7,000
Loss on sale of equipment $5,000
Gain on sale of investments ($3,000)
Changes in current operating assets and liabilities
Increase in accounts receivable ($40,000 − $30,000) ($10,000)
Increase in inventory ($103,000 − $77,000) ($26,000)
Increase in prepaid expenses ($10,000 − $6,000) ($4,000)
Increase in accounts payable ($20,000 − $16,000) $4,000
Increase in interest payable ($6,000 − $5,000) $1,000
Decrease in income tax payable ($8,000 − $10,000) ($2,000)
Net cash provided by operating activities $101,000
Cash flow from investing activities:
Sale of investments $60,000
Cost of land purchased ($190,000 − $100,000) ($90,000)
Sale of equipment $14,000
Improvements to buildings ($445,000 − $350,000) ($95,000)
Net cash used in investing activities ($111,000)
Cash flow from financing activities:
New common stock issued (3,000 × $8) $24,000
New bonds issued ($155,000 − $125,000) $30,000
Cash dividends paid ($50,000)
Net cash flow from financing activities: $4,000
Decrease in cash and cash equivalents ($6,000)
Add: Cash and cash equivalents at the beginning of the year $25,000
Cash and cash equivalents at the end of the year $19,000
c. Prepare the disclosure schedules as follows:
1. Supplemental cash flow disclosures
Interest paid during the year ($5,000 +$13,000 −$6,000) $12,000
Income tax paid during the year ($10,000 +$44,000 −$8,000) $46,000
2. Noncash investing and financing activities
250 shares of preferred stock is issued for patent acquisition $25,000
d. Compute the ratios as follows:
Operating cash flow to current liabilities $101,000 ÷ $32,500* 3.11
Operating cash flow to capital expenditure $101,000 ÷ $185,000** 0.55
* ($20,000 + 6,000 + 8,000 + 16,000 + 5,000 + 10,000) ÷ 2
** $90,000 + 95,000
Free cash flow ($101,000 − ($90,000 + 95,000 − 14000)) ($70,000)

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