Carpetland City reported net income of $78,500 for the year ended December 31, 2012. The following items were included on Carpetland's balance sheet at December 31, 2012 and 2011:

                                                12/31/12        12/31/11

Cash.......................................$ 14,400.........$26,300

Trade accounts payable....................23,900..........93,700

Inventories.................................105,500.........84,900

Carpetland uses the indirect method to prepare its statement of cash flows. Carpetland does not have any other current assets or current liabilities, and did not enter into any investing or financing activities during 2012.

Required

1. Prepare Carpetland's 2012 statement of cash flows.

2. Draft a brief memo to the president to explain why cash decreased during a profitable year.