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, 2013 Sales Revenue $750,000 Dividend Income 15,000 765,000 Cost of Goods Sold $440,000 Wages and Other Operating Expenses 130,000 Depreciation Expense 39,000 Patent Amortization Expense 7,000 Interest Expense 13,000 Income Tax Expense 44,000 Loss on Sale of Equipment 5,000 Gain on Sale of Investments (10,000) 668,000 Net Income $97,000 RAINBOW COMPANY Balance Sheets Dec. 31, 2013 Dec. 31, 2012 Assets Cash and Cash Equivalents $19,000 $25,000 Accounts Receivable 40,000 30,000 Inventory 103,000 77,000 Prepaid Expenses 10,000 6,000 Long-term Investments—Available for Sale - 50,000 Fair Value Adjustment to Investments - 7,000 Land 190,000 100,000 Buildings 445,000 350,000 Accumulated Depreciation - Buildings (91,000) (75,000) Equipment 179,000 225,000 Accumulated Depreciation—Equipment (42,000) (46,000) Patents 50,000 32,000 Total Assets $903,000 $781,000 Liabilities and Stockholders’ Equity Accounts Payable $20,000 $16,000 Interest Payable 6,000 5,000 Income Tax Payable 8,000 10,000 Bonds Payable 155,000 125,000 Preferred Stock ($100 par value) 100,000 75,000 Common Stock ($5 par value) 379,000 364,000 Paid-in-capital in Excess of Par Value—Common 133,000 124,000 Retained Earnings 102,000 55,000 Unrealized Gain on Investments - 7,000 Total Liabilities and Stockholders’ Equity $903,000 $781,000 During the year, the following transactions occurred: 1. Sold long-term investments costing $50,000 for $60,000 cash. Unrealized gains totaling $7,000 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 $14,000 cash that originally cost $46,000 and had $27,000 accumulated depreciation. 5. Issued bonds payable at face value for cash. 6. Acquired a patent with a fair value of $25,000 by issuing 250 shares of preferred stock at par value. 7. Declared and paid a $50,000 cash dividend. 8. Issued 3,000 shares of common stock for cash at $8 per share. 9. Recorded depreciation of $16,000 on buildings and $23,000 on equipment. Required a. Calculate the change in cash and cash equivalents that occurred during 2013. b. Prepare a statement of cash flows using the indirect method. a. Change in Cash during 2013 $Answer Answer 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 Activities Net Income Answer Add (deduct) items to convert net income to cash basis Depreciation Answer Patent Amortization Answer Loss on Sale of Equipment Answer Gain on Sale of Investments Answer Accounts Receivable Answer Answer Inventory Answer Answer Prepaid Expenses Answer Answer Accounts Payable Answer Answer Interest Payable Answer Answer Income Tax Payable Answer Answer Cash Flow Provided by Operating Activities Answer Cash Flow from Investing Activities Sale of Investments Answer Purchase of Land Answer Improvements to Building Answer Sale of equipment Answer Cash Used by Investing Activities Answer Cash Flow from Financing Activities Issuance of Bonds Payable Answer Issuance of Common Stock Answer Payment of Dividends Answer Cash Provided by Financing Activities Answer NetChange in Cash Answer Cash at Beginning of Year Answer Cash at End of Year Answer

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, 2013 Sales Revenue $750,000 Dividend Income 15,000 765,000 Cost of Goods Sold $440,000 Wages and Other Operating Expenses 130,000 Depreciation Expense 39,000 Patent Amortization Expense 7,000 Interest Expense 13,000 Income Tax Expense 44,000 Loss on Sale of Equipment 5,000 Gain on Sale of Investments (10,000) 668,000 Net Income $97,000 RAINBOW COMPANY Balance Sheets Dec. 31, 2013 Dec. 31, 2012 Assets Cash and Cash Equivalents $19,000 $25,000 Accounts Receivable 40,000 30,000 Inventory 103,000 77,000 Prepaid Expenses 10,000 6,000 Long-term Investments—Available for Sale - 50,000 Fair Value Adjustment to Investments - 7,000 Land 190,000 100,000 Buildings 445,000 350,000 Accumulated Depreciation - Buildings (91,000) (75,000) Equipment 179,000 225,000 Accumulated Depreciation—Equipment (42,000) (46,000) Patents 50,000 32,000 Total Assets $903,000 $781,000 Liabilities and Stockholders’ Equity Accounts Payable $20,000 $16,000 Interest Payable 6,000 5,000 Income Tax Payable 8,000 10,000 Bonds Payable 155,000 125,000 Preferred Stock ($100 par value) 100,000 75,000 Common Stock ($5 par value) 379,000 364,000 Paid-in-capital in Excess of Par Value—Common 133,000 124,000 Retained Earnings 102,000 55,000 Unrealized Gain on Investments - 7,000 Total Liabilities and Stockholders’ Equity $903,000 $781,000 During the year, the following transactions occurred: 1. Sold long-term investments costing $50,000 for $60,000 cash. Unrealized gains totaling $7,000 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 $14,000 cash that originally cost $46,000 and had $27,000 accumulated depreciation. 5. Issued bonds payable at face value for cash. 6. Acquired a patent with a fair value of $25,000 by issuing 250 shares of preferred stock at par value. 7. Declared and paid a $50,000 cash dividend. 8. Issued 3,000 shares of common stock for cash at $8 per share. 9. Recorded depreciation of $16,000 on buildings and $23,000 on equipment. Required a. Calculate the change in cash and cash equivalents that occurred during 2013. b. Prepare a statement of cash flows using the indirect method. a. Change in Cash during 2013 $Answer Answer 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 Activities Net Income Answer Add (deduct) items to convert net income to cash basis Depreciation Answer Patent Amortization Answer Loss on Sale of Equipment Answer Gain on Sale of Investments Answer Accounts Receivable Answer Answer Inventory Answer Answer Prepaid Expenses Answer Answer Accounts Payable Answer Answer Interest Payable Answer Answer Income Tax Payable Answer Answer Cash Flow Provided by Operating Activities Answer Cash Flow from Investing Activities Sale of Investments Answer Purchase of Land Answer Improvements to Building Answer Sale of equipment Answer Cash Used by Investing Activities Answer Cash Flow from Financing Activities Issuance of Bonds Payable Answer Issuance of Common Stock Answer Payment of Dividends Answer Cash Provided by Financing Activities Answer NetChange in Cash Answer Cash at Beginning of Year Answer Cash at End of Year Answer

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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, 2013
Sales Revenue		$750,000
Dividend Income		15,000
		765,000
Cost of Goods Sold	$440,000
Wages and Other Operating Expenses	130,000
Depreciation Expense	39,000
Patent Amortization Expense	7,000
Interest Expense	13,000
Income Tax Expense	44,000
Loss on Sale of Equipment	5,000
Gain on Sale of Investments	(10,000)	668,000
Net Income		$97,000

RAINBOW COMPANY Balance Sheets
	Dec. 31, 2013	Dec. 31, 2012
Assets
Cash and Cash Equivalents	$19,000	$25,000
Accounts Receivable	40,000	30,000
Inventory	103,000	77,000
Prepaid Expenses	10,000	6,000
Long-term Investments—Available for Sale	-	50,000
Fair Value Adjustment to Investments	-	7,000
Land	190,000	100,000
Buildings	445,000	350,000
Accumulated Depreciation - Buildings	(91,000)	(75,000)
Equipment	179,000	225,000
Accumulated Depreciation—Equipment	(42,000)	(46,000)
Patents	50,000	32,000
Total Assets	$903,000	$781,000
Liabilities and Stockholders’ Equity
Accounts Payable	$20,000	$16,000
Interest Payable	6,000	5,000
Income Tax Payable	8,000	10,000
Bonds Payable	155,000	125,000
Preferred Stock ($100 par value)	100,000	75,000
Common Stock ($5 par value)	379,000	364,000
Paid-in-capital in Excess of Par Value—Common	133,000	124,000
Retained Earnings	102,000	55,000
Unrealized Gain on Investments	-	7,000
Total Liabilities and Stockholders’ Equity	$903,000	$781,000

During the year, the following transactions occurred:
1. Sold long-term investments costing $50,000 for $60,000 cash. Unrealized gains totaling $7,000 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 $14,000 cash that originally cost $46,000 and had $27,000 accumulated depreciation.
5. Issued bonds payable at face value for cash.
6. Acquired a patent with a fair value of $25,000 by issuing 250 shares of preferred stock at par value.
7. Declared and paid a $50,000 cash dividend.
8. Issued 3,000 shares of common stock for cash at $8 per share.
9. Recorded depreciation of $16,000 on buildings and $23,000 on equipment.

Required
a. Calculate the change in cash and cash equivalents that occurred during 2013.
b. Prepare a statement of cash flows using the indirect method.

a. Change in Cash during 2013 $Answer Answer

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 Activities
Net Income		Answer
Add (deduct) items to convert net income to cash basis
Depreciation		Answer
Patent Amortization		Answer
Loss on Sale of Equipment		Answer
Gain on Sale of Investments		Answer
Accounts Receivable	Answer	Answer
Inventory	Answer	Answer
Prepaid Expenses	Answer	Answer
Accounts Payable	Answer	Answer
Interest Payable	Answer	Answer
Income Tax Payable	Answer	Answer
Cash Flow Provided by Operating Activities		Answer
Cash Flow from Investing Activities
Sale of Investments		Answer
Purchase of Land		Answer
Improvements to Building		Answer
Sale of equipment		Answer
Cash Used by Investing Activities		Answer
Cash Flow from Financing Activities
Issuance of Bonds Payable		Answer
Issuance of Common Stock		Answer
Payment of Dividends		Answer
Cash Provided by Financing Activities		Answer
NetChange in Cash	Answer
Cash at Beginning of Year		Answer
Cash at End of Year		Answer

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