Question

Statement of Cash Flows (Indirect Method) The Rainbow Company’s income statement and comparative balance sheets as of December 31 of 2016 and 2015 follow:

RAINBOW COMPANY Income Statement For the Year Ended December 31, 2016
Sales Revenue		$750,000
Dividend Income		19,000
		769,000
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	(10,000)	668,000
Net Income		$101,000

RAINBOW COMPANY Balance Sheets
	Dec. 31, 2016	Dec. 31, 2015
Assets
Cash and Cash Equivalents	$25,000	$29,000
Accounts Receivable	45,000	30,000
Inventory	103,000	77,000
Prepaid Expenses	10,000	6,000
Long-term Investments—Available for Sale	-	50,000
Fair Value Adjustment to Investments	-	7,000
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	$914,000	$785,000
Liabilities and Stockholders’ Equity
Accounts Payable	$22,000	$18,000
Interest Payable	6,000	5,000
Income Tax Payable	8,000	12,000
Bonds Payable	165,000	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	101,000	55,000
Unrealized Gain on Investments	-	7,000
Total Liabilities and Stockholders’ Equity	$914,000	$785,000

During the year, the following transactions occurred:
1. Sold long‑term investments costing $50,000 for $60,000 cash. Unrealized gains totaling $7,000 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 $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 $55,000 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. Calculate the change in cash and cash equivalents that occurred during 2016.
b. Prepare a statement of cash flows using the indirect method.

a. Change in Cash during 2016 $Answer AnswerIncreaseDecrease

b. Use a negative sign with cash outflow answers.

RAINBOW COMPANY Statement of Cash Flows For Year Ended December 31, 2016
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 AnswerIncreaseDecrease in Cash		Answer
Cash at Beginning of Year		Answer
Cash at End of Year		$Answer

Answer 1