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RAINBOW COMPANY Income Statement For Year Ended December 31, Year 8 Sales $375,000 Dividend Income Total Revenue 7,500 382,500 Cost of Goods Sold $220,000

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RAINBOW COMPANY Income Statement For Year Ended December 31, Year 8 Sales $375,000 Dividend Income Total Revenue 7,500 382,500 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 Gain on Sale of Investments Net Income 2,500 (1,500) 337,500 $45,000 RAINBOW COMPANY Balance Sheets December 31, Year 8 December 31, Year 7 Inventory Assets Cash and Cash Equivalents Accounts Receivable Prepaid Expenses Long-Term Investments Land Buildings $9,500 $12,500 20,000 15,000 51,500 38,500 5,000 3,000 28,500 95,000 50,000 225,500 175,000 Accumulated Depreciation-Buildings (45,500) (37,500) Equipment 89,500 112,500 Accumulated depreciation-Equipment (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 value-Common 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.

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