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5/2/2019 Chapter 4 REQUIRED HOMEWORK QUESTlON 4 Partially correct Mark 9.21 out of 10.00 Preparing a Statement of Cash Flows (Indirect Method)...

I need help understanding the OCFCL ratio, the operating cash flow to capital expenditures ratio, and free cash flow in this context.


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5/2/2019 Chapter 4 REQUIRED HOMEWORK QUESTlON 4 Partially correct Mark 9.21 out of 10.00 Preparing a Statement of Cash Flows (Indirect Method) Rainbow Company's income statement and comparative balance sheets follow. RAINBOW COMPANY
Income 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 $90900
RAINBOW COMPANY Balance Sheets December 31, 2016 December 31, 2015 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)
Equipment 179,000 225,000
Accumulated depreciation—Equipment (42,000) (46,000)
Patents 50,000 32,000
Total Assets $903,000 $781,000 Liabilities and Stockholders' Equity Accounts Payable $20,000 $16,000
Interest Payable 6,000 5,000
Income Tax Payable 8,000 10,000
Bonds Payable 155,000 125,000
Preferred Stock ($100 par value) 100,000 75,000
Common Stock ($5 par value) 379,000 364,000
Paid-in capital in excess of par value—Common 133,000 124,000
Retained Earnings 102,000 62,000 Total Liabilities and Stockholders' Equity $903000 $781900 During 2016, the following transactions and events occurred: 1 Sold long—term investments costing $57,000 for $60,000 cash. 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.

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5/2/2019 Chapter 4 REQUIRED HOMEWORK 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. Compute the change in cash and cash equivalents that occurred during 2016. $ (6,000) ‘V b. Prepare a 2016 statement of cash flows using the indirect method. RAINBOW COMPANY
STATEMENT OF CASH FLOWS
FOR YEAR ENDED DECEMBER 31, 2016 Cash flows from operating activities Net income V $ 90,000 V Add (deduct) items to convert net income to cash basis Depreciation 39,000 V Patent amortization 1V 7,000 V
Loss on sale of equipment 5,000 V
Gain on sale of investments (3,000) V
Accounts receivable increase (10,000) V
Inventory increase (26,000) V
Prepaid expenses increase (4.000) V
Accounts payable increase 4,000 V
Interest payable increase 1,000 V
Income tax payable decrease (2.000) V Net cash provided by operating activities 101,000 V Cash flows from investing activities Sale of investments 60,000 V
Purchase of land V (90,000) V
Improvements to building (95,000) V
Sale of equipment 14,000 V
Net cash used by investing activities (111,000) V Cash flows from financing activities Issuance of bonds payable V 30,000 V
Issuance of common stock 24,000 V
Payment of dividends (50.000) V
Net cash provided by financing activities 4.000 V
Net change in cash V (6,000) V Cash and cash equivalents at beginning ofyear V 25,000 V

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5/2/2019 Chapter 4 REQUIRED HOMEWORK RAINBOW COMPANY
STATEMENT OF CASH FLOWS
FOR YEAR ENDED DECEMBER 31, 2016 Cash and cash equivalents at end of year 19.000 V c. Prepare separate schedules showing (1) cash paid for interest and for income taxes and (2) noncash investing and
financing transactions. (1) Supplemental Cash Flow Disclosures Cash paid for interest $= 12,000 'V Cash paid for income taxes $3 46,000 V
(2) Schedule of noncash investing and financing activities: Issuance of preferred stock to acquire patent V $’ 25,000 V 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. (1) Operating cash flow to current liabilities ratio 0.91 X
(2) Operating cash flow to capital expenditures ratio 0.53 X (3) Free cash flow $ 19,000 X

Top Answer

Operating Cash flows to current liabilities = 101000/34000 = 2.97 (current liabilities include... View the full answer

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