Question

Preparing a Statement of Cash Flows (Direct 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 $171,000 $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 $8,127,000 $7,029,000 Liabilities and Stockholders' Equity Accounts Payable $180,000 $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

Answer 1

Solution

As Asked solving only Part 2

b)  

Rainbow Company
Statement of Cash Flows (Direct Method)
For the year ended december 31st, 2016
		Amount
Cash flow from Operating Activities
Cash received from customers	$          6,660,000
Cash Received as dividend	$            135,000
less: Cash payments for		6,795,000
Cash Paid for merchandise purchased	$          4194,000
Cash Paid for wages and other operating expense	$          1206,000
Cash Paid for interest	$            108,000
Cash Paid for income taxes	$            378,000	-5,886,000
Net Cash provided by Operating Activities		909,000
Cash flow from Investing Activities
Sale of investments	$            540,000
Purchase of Land	$          -810,000
Inprovements to building	$          -855,000
Sale of equipment	$            126,000
Net cash flow from Investing Activities		-999,000
Cash flow from Financing Activities
Issuance of common stock	$            216,000
payment of dividend	$          -450,000
issue of bonds payable	$            270,000
Net Cash flow from Financing Activities		36,000
Net Change in cash		-54,000
Cash & Cash equivalents at beginning of the year		225,000
Cash & Cash equivalents at end of the year		171,000
Reconciliation of Net Income to net operating cash flows
Cash flow from Operating Activities	Amount
Net Income	$            810,000
add/deduct items to convert net income to cash basis
Depreciation	$            351,000
Patent Amortization exp	$                63,000
Loss on sale of Equipments	$                45,000
Gain on sale of investment	$              -27,000
Increase in Account Receivables	$              -90,000
Increase in Invenotry	$          -234,000
Increase in Prepaid Expense	$              -36,000
Increase in Account Payables	$                36,000
Increase in Interest payable	$                  9,000
Decrease in tax payable	$              -18,000
Net Cash provided by Operating Activities	$            909,000