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, 2018 Sales $750,000 Dividend Income 15,000 Total Revenue 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 (3,000) 675,000 Net Income $90,000 RAINBOW COMPANY Balance Sheets December 31, 2018 December 31, 2017 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 57,000 Land 190,000 100,000 Buildings 445,000 350,000 Accumulated Depreciation-Buildings (91,000) (75,000)

Answer 1

Answer with working notes is given below

a) Change in Cash and Cash equivalents -$6,000 ($19,000-$25,000) Amount $755,000 -$654,000 $101,000 RAINBOW COMPANY Statement of Cash flows (Direct method) For the year ended December 31,2018 Cash flows from Operating Activities Cash received from customers $740,000 Cash received as dividend $15,000 Less: Cash payments for Cash paid for merchandise purchased -$462,000 Cash paid for wages and other operating expense -$134,000 Cash paid for Interest -$12,000 Cash paid for Income taxes -$46,000 Net Cash provided by Operating Activities Cash flows from Investing Activities Sale of investments $60,000 Purchase of Land -$90,000 Improvements to building -$95,000 Sale of equipment $14,000 Net Cash from Investing Activities Cash flows from Financing Activities Issuance of common stock $24,000 Payment of dividend -$50,000 Issue of Bonds payable $30,000 Net Cash from Financing Activities Net change in cash Cash and Cash equivalents at beginning of year Cash and Cash equivalents at end of year -$111,000 $4,000 $6,000 $25,000 $19,000 Reconciliation of Net income to net operating cash flow Cash flows from Operating Activities Amount Net Income $90,000 Add (deduct) items to convert net income to cash basis Depreciation $39,000 Patent amortization expense $7,000 Loss on sale of Equipment $5,000 Gain on sale of investments ($3,000) Increase in Accounts Receivable ($10,000) Increase in Inventory ($26,000) Increase in prepaid expense ($4,000) Increase in Accounts payable $4,000 Increase in Interest payable $1,000 Decrease in tax payable ($2,000) Net Cash provided by Operating Activities $101,000 1) Cash paid for Interest and income taxes Cash paid for interest Interest expense Less: Increase in interest payable Net cash paid for Interest $13,000 $1,000 $12,000 Cash paid for income tax Income tax expense Add: Decrease in tax payable Net cash paid for Income tax $44,000 $2,000 $46,000 2) Schedule for non-cash investing and financing activities Acquisition of patents by issuing 250 preferred stock at par value) $25,000 Working notes: Amount of cash received from Customers Sales Less: Increase in Accounts receivable Net cash received from customers $750,000 $10,000 $740,000 Cost of inventory purchased Cost of Goods sold Add: Increase in inventory Merchandise purchase $440,000 $26,000 $466,000 Amount of cash paid to suppliers of merchandise cost of purchase Less: Increase in Accounts payable Cash paid for merchandise purchased $466,000 -$4,000 $462,000 C Amount of cash paid to wages and Operating expense wages and other operating expenses Add: Increase in prepaid expenses Net cash paid for wages and operating expense $130,000 $4,000 $134,000