Effects of Changes in Inventory and Accounts Payable Balances on Statement of Cash Flows Carpetland City reported net income of $78,500 for the year ended December 31, 2008. The following items were included on Carpetland’s balance sheet at December 31, 2008 and 2007:

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 2008.
Required 1. Prepare Carpetland’s 2008 statement of cash flows.
2. Draft a brief memo to the president to explain why cash decreased during a profitable year.

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12/31/08 12/31/07 Cash $ 14,400 $26,300 Trade accounts payable 23,900 93,700 Inventories 105,500 84,900