Preparing a Statement of Cash Flows (Direct Method) Rainbow Company's income statement and comparative balance sheets follow. $1,125,000 22,500 1,147,500 RAINBOW COMPANY Income Statement For Year Ended December 31, 2016 Sales Dividend Income Total Revenue Cost of Goods Sold $660,000 Wages and Other Operating Expenses 195,000 Depreciation Expense 58,500 Patent Amortization Expense 10,500 Interest Expense 19,500 Income Tax Expense 66,000 Loss on Sale of Equipment 7,500 Gain on Sale of Investments (4,500 Net Income 1,012,500 $135,000 RAINBOW COMPANY Balance Sheets December 31, 2016 December 31, 2015 $28,500 60,000 154,500 15,000 Assets Cash and Cash Equivalents Accounts Receivable Inventory Prepaid Expenses Long-Term Investments Land Buildings Accumulated Depreciation-Buildings Equipment Accumulated depreciation Equipment Patents Total Assets Liabilities and Stockholders' Equity Accounts Payable Interest Payable Income Tax Payable Bonds Payable Preferred Stock ($100 par value) Common Stock ($5 par value) Paid-in capital in excess of par value-Common Retained Earnings Total Liabilities and Stockholders' Equity 285,000 667,500 (136,500) 268,500 (63,000) 75,000 $1,354,500 $37,500 45,000 115,500 9,000 85,500 150,000 525,000 (112,500) 337,500 (69,000) 48,000 $1,171,500 $30,000 9,000 12,000 232,500 150,000 568,500 199,500 153,000 $1,354,500 $24,000 7,500 15,000 187,500 112,500 546,000 186,000 93,000 $1,171,500 During 2016, the following transactions and events occurred: 1 Sold long-term investments costing $85,500 for $90,000 cash. 2 Purchased land for cash. 3 Capitalized an expenditure made to improve the building. 4 Sold equipment for $21,000 cash that originally cost $69,000 and had $40,500 accumulated depreciation. 5 Issued bonds payable at face value for cash. 6 Acquired a patent with a fair value of $37,500 by issuing 375 shares of preferred stock at par value. 7 Declared and paid a $75,000 cash dividend. 8 Issued 4,500 shares of common stock for cash at $8 per share. 9 Recorded depreciation of $24,000 on buildings and $34,500 on equipment. Required a. Compute the change in cash and cash equivalents that occurred during 2016. $ 0 b. Prepare a 2016 statement of cash flows using the direct method. Use one cash outflow for "cash paid for wages and other operating expenses." Accounts payable relate to inventory purchases only. 0 $ 0 RAINBOW COMPANY STATEMENT OF CASH FLOWS (Direct Method) FOR YEAR ENDED DECEMBER 31, 2016 Cash flows from operating activities Cash received from customers Cash received as dividends Cash paid for merchandise purchased Cash paid for wages and other operating expenses Cash paid for interest Cash paid for income taxes Net cash from operating activities Cash flows from investing activities Sale of investments Purchase of land Improvements to building Sale of equipment Net cash from investing activities Cash flows from financing activities Issuance of bonds payable Issuance of common stock Payment of dividends Net cash from financing activities Net change in cash Beginning cash balance Ending cash balance c. Prepare separate schedules showing (1) cash paid for interest and for income taxes and (2) noncash investing and financing transactions. (1) Reconciliation of net income to net cash flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Loss on sale of equipment Gain on sale of investments Accounts receivable increase Inventory increase Prepaid expenses increase Accounts payable increase Interest payable increase Income tax payable decrease Net cash provided by operating activities (2) Schedule of noncash investing and financing activities: Issuance of preferred stock to acquire patent 0 00OOOOOOOOO Preparing a Statement of Cash Flows (Direct Method) Rainbow Company's income statement and comparative balance sheets follow. $1,125,000 22,500 1,147,500 RAINBOW COMPANY Income Statement For Year Ended December 31, 2016 Sales Dividend Income Total Revenue Cost of Goods Sold $660,000 Wages and Other Operating Expenses 195,000 Depreciation Expense 58,500 Patent Amortization Expense 10,500 Interest Expense 19,500 Income Tax Expense 66,000 Loss on Sale of Equipment 7,500 Gain on Sale of Investments (4,500 Net Income 1,012,500 $135,000 RAINBOW COMPANY Balance Sheets December 31, 2016 December 31, 2015 $28,500 60,000 154,500 15,000 Assets Cash and Cash Equivalents Accounts Receivable Inventory Prepaid Expenses Long-Term Investments Land Buildings Accumulated Depreciation-Buildings Equipment Accumulated depreciation Equipment Patents Total Assets Liabilities and Stockholders' Equity Accounts Payable Interest Payable Income Tax Payable Bonds Payable Preferred Stock ($100 par value) Common Stock ($5 par value) Paid-in capital in excess of par value-Common Retained Earnings Total Liabilities and Stockholders' Equity 285,000 667,500 (136,500) 268,500 (63,000) 75,000 $1,354,500 $37,500 45,000 115,500 9,000 85,500 150,000 525,000 (112,500) 337,500 (69,000) 48,000 $1,171,500 $30,000 9,000 12,000 232,500 150,000 568,500 199,500 153,000 $1,354,500 $24,000 7,500 15,000 187,500 112,500 546,000 186,000 93,000 $1,171,500 During 2016, the following transactions and events occurred: 1 Sold long-term investments costing $85,500 for $90,000 cash. 2 Purchased land for cash. 3 Capitalized an expenditure made to improve the building. 4 Sold equipment for $21,000 cash that originally cost $69,000 and had $40,500 accumulated depreciation. 5 Issued bonds payable at face value for cash. 6 Acquired a patent with a fair value of $37,500 by issuing 375 shares of preferred stock at par value. 7 Declared and paid a $75,000 cash dividend. 8 Issued 4,500 shares of common stock for cash at $8 per share. 9 Recorded depreciation of $24,000 on buildings and $34,500 on equipment. Required a. Compute the change in cash and cash equivalents that occurred during 2016. $ 0 b. Prepare a 2016 statement of cash flows using the direct method. Use one cash outflow for "cash paid for wages and other operating expenses." Accounts payable relate to inventory purchases only. 0 $ 0 RAINBOW COMPANY STATEMENT OF CASH FLOWS (Direct Method) FOR YEAR ENDED DECEMBER 31, 2016 Cash flows from operating activities Cash received from customers Cash received as dividends Cash paid for merchandise purchased Cash paid for wages and other operating expenses Cash paid for interest Cash paid for income taxes Net cash from operating activities Cash flows from investing activities Sale of investments Purchase of land Improvements to building Sale of equipment Net cash from investing activities Cash flows from financing activities Issuance of bonds payable Issuance of common stock Payment of dividends Net cash from financing activities Net change in cash Beginning cash balance Ending cash balance c. Prepare separate schedules showing (1) cash paid for interest and for income taxes and (2) noncash investing and financing transactions. (1) Reconciliation of net income to net cash flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Loss on sale of equipment Gain on sale of investments Accounts receivable increase Inventory increase Prepaid expenses increase Accounts payable increase Interest payable increase Income tax payable decrease Net cash provided by operating activities (2) Schedule of noncash investing and financing activities: Issuance of preferred stock to acquire patent 0 00OOOOOOOOO