Statement of Cash Flows (Indirect Method) The Rainbow Company’s income statement
ID: 2570222 • Letter: S
Question
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:
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.
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
Explanation / Answer
Rainbow Company
Statement of Cash flows for the period ended December 31, 2013
Cash flows from Operations
Net Income
97,000
Add: depreciation
39,000
Add: patent amortization
7,000
Add: Loss on sale of equipment
5,000
Less: Gain on sale of investments
(10,000)
Change in Accounts receivable
(10,000)
Change in Inventories
(26,000)
Change in Prepaid expenses
(4,000)
Change in Accounts payable
4,000
Change in Interest payable
1,000
Change in Income tax payable
(2,000)
Net cash from operating activities
101,000
Cash flows from Investing activities
Purchase of Land
(90,000)
Purchase of Building
(95,000)
Proceeds from sale of equipment
14,000
Proceeds from sale of investment
60,000
Net Cash flows used in Investing activities
(111,000)
Cash flows from financing activities
Issued Bonds
30,000
Issue of Common stock
15,000
Increase in paid in capital
9,000
Dividend paid
(50,000)
Cash flows from financing activities
4,000
Net cash increase in cash and cash equivalents
(6,000)
Beginning Cash balance
25,000
Ending cash balance
19,000
Rainbow Company
Statement of Cash flows for the period ended December 31, 2013
Cash flows from Operations
Net Income
97,000
Add: depreciation
39,000
Add: patent amortization
7,000
Add: Loss on sale of equipment
5,000
Less: Gain on sale of investments
(10,000)
Change in Accounts receivable
(10,000)
Change in Inventories
(26,000)
Change in Prepaid expenses
(4,000)
Change in Accounts payable
4,000
Change in Interest payable
1,000
Change in Income tax payable
(2,000)
Net cash from operating activities
101,000
Cash flows from Investing activities
Purchase of Land
(90,000)
Purchase of Building
(95,000)
Proceeds from sale of equipment
14,000
Proceeds from sale of investment
60,000
Net Cash flows used in Investing activities
(111,000)
Cash flows from financing activities
Issued Bonds
30,000
Issue of Common stock
15,000
Increase in paid in capital
9,000
Dividend paid
(50,000)
Cash flows from financing activities
4,000
Net cash increase in cash and cash equivalents
(6,000)
Beginning Cash balance
25,000
Ending cash balance
19,000
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