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 $2,250,000 Dividend Income 45,000 Total Revenue 2,295,000 Cost of Goods Sold $1,320,000 Wages and Other Operating Expenses 390,000 Depreciation Expense 117,000 Patent Amortization Expense 21,000 Interest Expense 39,000 Income Tax Expense 132,000 Loss on Sale of Equipment 15,000 Gain on Sale of Investments (9,000) 2,025,000 Net Income $270,000 RAINBOW COMPANY Balance Sheets December 31, 2016 December 31, 2015 Assets Cash and Cash Equivalents $57,000 $75,000 Accounts Receivable 120,000 90,000 Inventory 309,000 231,000 Prepaid Expenses 30,000 18,000 Long-Term Investments 171,000 Land 570,000 300,000 Buildings 1,335,000 1,050,000 Accumulated Depreciation-Buildings (273,000) (225,000) Equipment 537,000 675,000 Accumulated depreciation-Equipment (126,000) (138,000) Patents 150,000 96,000 Total Assets $2,709,000 $2,343,000 Liabilities and Stockholders' Equity Accounts Payable $60,000 $48,000 Interest Payable 18,000 15,000 Income Tax Payable 24,000 30,000 Bonds Payable 465,000 375,000 Preferred Stock ($100 par value) 300,000 225,000 Common Stock ($5 par value) 1,137,000 1,092,000 Paid-in capital in excess of par value-Common 399,000 372,000 Retained Earnings 306,000 186,000 Total Liabilities and Stockholders' Equity $2,709,000 $2,343,000 During 2016, the following transactions and events occurred: 1 Sold long-term investments costing $171,000 for $180,000 cash. 2 Purchased land for cash. 3 Capitalized an expenditure made to improve the building. 4 Sold equipment for $42,000 cash that originally cost $ 138,000 and had $81,000 accumulated depreciation. 5 Issued bonds payable at face value for cash. 6 Acquired a patent with a fair value of $75,000 by issuing 750 shares of preferred stock at par value. 7 Declared and paid a $150,000 cash dividend. 8 Issued 9,000 shares of common stock for cash at $8 per share. 9 Recorded depreciation of $48,000 on buildings and $69,000 on equipment. a. Compute the change in cash and cash equivalents that occurred during 2016. Note: Use a negative sign with your answer, if the change is a decrease. $ -18000 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. C. Prepare separate schedules showing (1) cash paid for interest and for income taxes and (2) noncash investing and financing transactions. $ $ 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 Improvements to building Sale of equipment Net cash from investing activities Cash flows from financing activities Issuance of common stock Payment of dividends Net cash from financing activities Ending cash balance $ (1) Reconciliation of net income to net cash flow from operating activities 0 Add (deduct) items to convert net income to cash basis Depreciation 0 0 0 0 0 0 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: 0 0 0 TA $ 0