Statement of Cash Flows (Indirect Method)

The Rainbow Company's income statement and comparative balance sheets as of December 31 of 2013 and 2012 follow:

RAINBOW COMPANY

Income Statement

For the Year Ended December 31, 2013Sales Revenue$1,050,000Dividend Income21,0001,071,000Cost of Goods Sold$616,000Wages and Other Operating Expenses182,000Depreciation Expense54,600Patent Amortization Expense9,800Interest Expense18,200Income Tax Expense61,600Loss on Sale of Equipment7,000Gain on Sale of Investments(14,000)935,200Net Income$135,800

RAINBOW COMPANY

Balance SheetsDec. 31, 2013Dec. 31, 2012AssetsCash and Cash Equivalents$26,600$35,000Accounts Receivable56,00042,000Inventory144,200107,800Prepaid Expenses14,0008,400Long-term Investments-Available for Sale-70,000Fair Value Adjustment to Investments-9,800Land266,000140,000Buildings623,000490,000Accumulated Depreciation - Buildings(127,400)(105,000)Equipment250,600315,000Accumulated Depreciation-Equipment(58,800)(64,400)Patents70,00044,800Total Assets$1,264,200$1,093,400Liabilities and Stockholders' EquityAccounts Payable$28,000$22,400Interest Payable8,4007,000Income Tax Payable11,20014,000Bonds Payable217,000175,000Preferred Stock ($100 par value)140,000105,000Common Stock ($5 par value)530,600509,600Paid-in-capital in Excess of Par Value-Common186,200173,600Retained Earnings142,80077,000Unrealized Gain on Investments-9,800Total Liabilities and Stockholders' Equity$1,264,200$1,093,400

During the year, the following transactions occurred:

1. Sold long-term investments costing $70,000 for $84,000 cash. Unrealized gains totaling $9,800 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 $19,600 cash that originally cost $64,400 and had $37,800 accumulated depreciation.

5. Issued bonds payable at face value for cash.

6. Acquired a patent with a fair value of $35,000 by issuing 350 shares of preferred stock at par value.

7. Declared and paid a $70,000 cash dividend.

8. Issued 4,200 shares of common stock for cash at $8 per share.

9. Recorded depreciation of $22,400 on buildings and $32,200 on equipment.

a. Calculate the change in cash and cash equivalents that occurred during 2013.

b. a statement of cash flows using the indirect method.

a. Change in Cash during 2013

Increase

Decrease

b. Use a negative sign with cash outflow answers.

RAINBOW COMPANY

Statement of Cash Flows

For Year Ended December 31, 2013

Cash Flow from Operating ActivitiesNet Income

Add (deduct) items to convert net income to cash basisDepreciation

Patent Amortization

Loss on Sale of Equipment

Gain on Sale of Investment

Accounts Receivable

Increase

Decrease

Inventory

Increase

Decrease

Prepaid Expenses

Increase

Decrease

Accounts Payable

Increase

Decrease

Interest Payable

Increase

Decrease

Income Tax Payable

Increase

Decrease

Cash Flow Provided by Operating Activities

Cash Flow from Investing ActivitiesSale of Investments

Purchase of Land

Improvements to Building

Sale of equipment

Cash Used by Investing Activities

Cash Flow from Financing ActivitiesIssuance of Bonds Payable

Issuance of Common Stock

Payment of Dividends

Cash Provided by Financing Activities

Net Change in Cash

Cash at Beginning of Year

Cash at End of Year