Preparing a Statement of Cash Flows (Indirect Method)

Rainbow Companys income statement and comparative balance sheets follow.

RAINBOW COMPANY Income Statement For Year Ended December 31, Year 8
	Sales		$375,000
	Dividend Income		7,500
	Total Revenue		382,500
	Cost of Goods Sold	$220,000
	Wages and Other Operating Expenses	65,000
	Depreciation Expense	19,500
	Patent Amortization Expense	3,500
	Interest Expense	6,500
	Income Tax Expense	22,000
	Loss on Sale of Equipment	2,500
	Gain on Sale of Investments	(1,500)	337,500
	Net Income		$45,000

RAINBOW COMPANY Balance Sheets
		December 31, Year 8	December 31, Year 7
	Assets
	Cash and Cash Equivalents	$9,500	$12,500
	Accounts Receivable	20,000	15,000
	Inventory	51,500	38,500
	Prepaid Expenses	5,000	3,000
	Long-Term Investments	-	28,500
	Land	95,000	50,000
	Buildings	225,500	175,000
	Accumulated DepreciationBuildings	(45,500)	(37,500)
	Equipment	89,500	112,500
	Accumulated depreciationEquipment	(21,000)	(23,000)
	Patents	25,000	16,000
	Total Assets	$451,500	$390,500
	Liabilities and Stockholders Equity
	Accounts Payable	$10,000	$8,000
	Interest Payable	3,000	2,500
	Income Tax Payable	4,000	5,000
	Bonds Payable	77,500	62,500
	Preferred Stock ($100 par value)	50,000	37,500
	Common Stock ($5 par value)	189,500	182,000
	Paid-in capital in excess of par valueCommon	66,500	62,000
	Retained Earnings	51,000	31,000
	Total Liabilities and Stockholders Equity	$451,500	$390,500

During Year 8, the following transactions and events occurred:

1		Sold long-term investments costing $28,500 for $30,000 cash.
2		Purchased land for cash.
3		Capitalized an expenditure made to improve the building.
4		Sold equipment for $7,000 cash that originally cost $23,000 and had $13,500 accumulated depreciation.
5		Issued bonds payable at face value for cash.
6		Acquired a patent with a fair value of $12,500 by issuing 125 shares of preferred stock at par value.
7		Declared and paid a $25,000 cash dividend.
8		Issued 1,500 shares of common stock for cash at $8 per share.
9		Recorded depreciation of $8,000 on buildings and $11,500 on equipment.

a. Compute the change in cash and cash equivalents that occurred during Year 8. b. Prepare a Year 8 statement of cash flows using the indirect method. c. Prepare separate schedules showing (1) cash paid for interest and for income taxes and (2) noncash investing and financing transactions. d. Compute its (1) operating cash flow to current liabilities ratio, (2) operating cash flow to capital expenditures ratio, and (3) free cash flow.

• part a.
• part b.
• part c.
• part d.

a. Compute the change in cash and cash equivalents that occurred during Year 8. Note: Use a negative sign with your answer, if the change was a decrease. $Answer