Question

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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 Accounts Receivable Inventory Prepaid Expenses Long-Term Investments Land $145,000 360,000 927,000 90,000 $225,000 270,000 693,000 54,000 513,000 900,000 1,710,000

Answer 1

Part-a -$80,000 Change in Cash & Cash Equivalent (i.e) $1,45,000-$2,25,000 Part-b Raibow Company Statement of Cash Flows For the Year Ended on 31st December, 2016 Amount ($) 8,10,000 3,51,000 63,000 45,000 -27,000 -90,000 -2,34,000 -36,000 10,000 9,000 -18.000 8,83,000 Particulars Cash Flow from operating activities Net Income Add (deduct) items to convert net income to cash basis Depreciation Patent amortization 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 Cash Flow from Investing Activities Sale of Investments Purchase of Land Improvement to Building Sale of Equipment Net Cash Used by Investing Activities Cash Flow from Financing Activities Issuance of Common Stock Paid in capital in excess of par value common Issue of Bonds Payable Payment of Dividends Net Cash provided by financing activities Net Change in cash Cash & Cash equivalents at the beginning of the year Cash & Cash equivalents at the end of the year 5,40,000 -8,10,000 -8,55,000 1,26,000 -9,99,000 1,35,000 81,000 2,70,000 -4,50,000 36,000 -80,000 2.25.000 1,45,000 Part-c Amount ($) Particulars (1) Supplemental Cash Flow Disclosures Cash Paid for Interest Cash paid for Income Taxes (2) Schedules of Noncash investing and financing activities Acquisition of patents by issuing 2250 preffered stock at par value 1,08.000 4, 14.000 2,25,000 1) Cash paid for interest and income taxes Cash paid for interest Particulars Interest expense Less: Increase in interest payable Net Cash paid for Interest Amount ($) 1,17.000 -9,000 1,08,000 Cash paid for Income Tax Particulars Income Tax Expenses Add: Decrease in Tax Payable Net Cash paid for Interest Amount ($) 3,96,000 18,000 4,14,000 Part-d 1) Operating Cash Flow to current liabilities ratio =Cash Flow from operations/current liabilities -8,83,000/280000 =3.15 2) Operating Cash Flow to capital expenditure ratio =Cash Flow from operations/Capital Expenditure =8,83,000/9,99,000 =0.8839 3) Free Cash Flow Particulars Cash flow from operating activities Add: Interest Expenses Less: Tax shield on Interest expenses Less: Capital Expenditure (CAPEX) Free Cash Flow Amount ($) 8,83.000 1,17,000 -3,96,000 9,99,000 16,03,000