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		$6,750,000
	Dividend Income		135,000
	Total Revenue		6,885,000
	Cost of Goods Sold	$3,960,000
	Wages and Other Operating Expenses	1,170,000
	Depreciation Expense	351,000
	Patent Amortization Expense	63,000
	Interest Expense	117,000
	Income Tax Expense	396,000
	Loss on Sale of Equipment	45,000
	Gain on Sale of Investments	(27,000)	6,075,000
	Net Income		$810,000

RAINBOW COMPANY Balance Sheets
		December 31, 2016	December 31, 2015
	Assets
	Cash and Cash Equivalents	$145,000	$225,000
	Accounts Receivable	360,000	270,000
	Inventory	927,000	693,000
	Prepaid Expenses	90,000	54,000
	Long-Term Investments	-	513,000
	Land	1,710,000	900,000
	Buildings	4,005,000	3,150,000
	Accumulated Depreciation-Buildings	(819,000)	(675,000)
	Equipment	1,611,000	2,025,000
	Accumulated depreciation-Equipment	(378,000)	(414,000)
	Patents	450,000	288,000
	Total Assets	$8,101,000	$7,029,000
	Liabilities and Stockholders Equity
	Accounts Payable	$154,000	$144,000
	Interest Payable	54,000	45,000
	Income Tax Payable	72,000	90,000
	Bonds Payable	1,395,000	1,125,000
	Preferred Stock ($100 par value)	900,000	675,000
	Common Stock ($5 par value)	3,411,000	3,276,000
	Paid-in capital in excess of par value-Common	1,197,000	1,116,000
	Retained Earnings	918,000	558,000
	Total Liabilities and Stockholders Equity	$8,101,000	$7,029,000

During 2016, the following transactions and events occurred:

1		Sold long-term investments costing $513,000 for $540,000 cash.
2		Purchased land for cash.
3		Capitalized an expenditure made to improve the building.
4		Sold equipment for $126,000 cash that originally cost $414,000 and had $243,000 accumulated depreciation.
5		Issued bonds payable at face value for cash.
6		Acquired a patent with a fair value of $225,000 by issuing 2,250 shares of preferred stock at par value.
7		Declared and paid a $450,000 cash dividend.
8		Issued 27,000 shares of common stock for cash at $8 per share.
9		Recorded depreciation of $144,000 on buildings and $207,000 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
Answer

Answer
Add (deduct) items to convert net income to cash basis
Depreciation	Answer
Answer

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
Answer

Answer
Improvements to building	Answer
Sale of equipment	Answer
Net cash used by investing activities		Answer
Cash flows from financing activities
Answer

Answer
Issuance of common stock	Answer
Payment of dividends	Answer
Net cash provided by financing activities		Answer
Answer

	Answer
Answer

	Answer
Ending cash balance		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:
Answer

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	Answer