Preparing a Statement of Cash Flows (Indirect Method) Rainbow Company’s income s
ID: 2328900 • Letter: P
Question
Preparing a Statement of Cash Flows (Indirect Method)
Rainbow Company’s income statement and comparative balance sheets follow.
During 2016, the following transactions and events occurred:
Required
a. Compute the change in cash and cash equivalents that occurred during 2016.
$Answer
b. Prepare a 2016 statement of cash flows using the indirect method.
c. Prepare separate schedules showing (1) cash paid for interest and for income taxes and (2) noncash investing and financing transactions.
d. Compute its (1) operating cash flow to current liabilities ratio, (2) operating cash flow to capital expenditures ratio, and (3) free cash flow.
Round your answers to (1) and (2) to two decimal places.
Free cash flow
I cant figure out free cash flow. I know how to do the rest.
RAINBOW COMPANYIncome Statement
For Year Ended December 31, 2016 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
Explanation / Answer
a. Compute the change in cash and cash equivalents as follows: Particulars Amount Cash and cash equivalents at the end of year 2016 $19,000 Less: Cash and cash equivalents at the beginning of year 2016 $25,000 Decrease in cash and cash equivalents in 2016 ($6,000) b. Prepare the cashflow statement as flows: R Inc., Cash Flow Statement For the Year Ended December 31, 2016 Particulars Amount Amount Cash flow from operating activities: Net income $90,000 Adjustments to reconcile net income to operating cash flows: Depreciation expense $39,000 Amortization expense $7,000 Loss on sale of equipment $5,000 Gain on sale of investments ($3,000) Changes in current operating assets and liabilities Increase in accounts receivable ($40,000 $30,000) ($10,000) Increase in inventory ($103,000 $77,000) ($26,000) Increase in prepaid expenses ($10,000 $6,000) ($4,000) Increase in accounts payable ($20,000 $16,000) $4,000 Increase in interest payable ($6,000 $5,000) $1,000 Decrease in income tax payable ($8,000 $10,000) ($2,000) Net cash provided by operating activities $101,000 Cash flow from investing activities: Sale of investments $60,000 Cost of land purchased ($190,000 $100,000) ($90,000) Sale of equipment $14,000 Improvements to buildings ($445,000 $350,000) ($95,000) Net cash used in investing activities ($111,000) Cash flow from financing activities: New common stock issued (3,000 × $8) $24,000 New bonds issued ($155,000 $125,000) $30,000 Cash dividends paid ($50,000) Net cash flow from financing activities: $4,000 Decrease in cash and cash equivalents ($6,000) Add: Cash and cash equivalents at the beginning of the year $25,000 Cash and cash equivalents at the end of the year $19,000 c. Prepare the disclosure schedules as follows: 1. Supplemental cash flow disclosures Interest paid during the year ($5,000 +$13,000 $6,000) $12,000 Income tax paid during the year ($10,000 +$44,000 $8,000) $46,000 2. Noncash investing and financing activities 250 shares of preferred stock is issued for patent acquisition $25,000 d. Compute the ratios as follows: Operating cash flow to current liabilities $101,000 ÷ $32,500* 3.11 Operating cash flow to capital expenditure $101,000 ÷ $185,000** 0.55 * ($20,000 + 6,000 + 8,000 + 16,000 + 5,000 + 10,000) ÷ 2 ** $90,000 + 95,000 Free cash flow ($101,000 ($90,000 + 95,000 14000)) ($70,000)