Statement of Cash Flows—Direct Method Wabash Corp. just completed another successful year, as indicated by the following income statement:

Other information is as follows:

a. Dividends of $350,000 were declared and paid during the year.

b. Operating expenses include $25,000 of depreciation.

c. Land was sold for its book value, and new plant and equipment was acquired for cash.

d. Part of the bank loan was repaid, and additional common stock was issued for cash.
The president has asked you some questions about the year’s results. She is very impressed with the profit margin of 14% (net income divided by sales revenue). She is bothered, however, by the decline in the company’s cash balance during the year. One of the conditions of the existing bank loan is that the company maintain a minimum cash balance of $100,000.
Required 1. Prepare a statement of cash flows for 2008 using the direct method in the Operating Activities section.
2. On the basis of your statement in (1), draft a brief memo to the president to explain why cash decreased during such a profitable year. Include in your explanation any recommendations for improving the company’s cash flow in future years.

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Sales revenue Cost of goods sold Gross profit Operating expenses Income before interest and taxes Interest expense Income before taxes Income tax expense Net income Presented here are comparative balance sheets: For the Year Ended December 31, 2008 $2,460,000 1,400,000 $1,060,000 460,000 $ 600,000 100,000 $ 500,000 150,000 $ 350,000 December 31 Cash Accounts receivable Inventory 2008 2007 $ 140,000 60,000 200,000 $ 210,000 145,000 180,000 Prepayments 15,000 25,000 Total current assets $ 415,000 $ 560,000 Land $ 600,000 Plant and equipment Total long-term assets Total assets Accounts payable Other accrued liabilities Income taxes payable Total current liabilities 850,000 $ 700,000 600,000 Accumulated depreciation (225,000) (200,000) $1,225,000 $1,100,000 $1,640,000 $1,660,000 $ 140,000 $ 120,000 50,000 55,000 80,000 115,000 $ 270,000 $ 290,000 Long-term bank loan payable $ 200,000 $ 250,000 Common stock $ 450,000 $ 400,000 Retained earnings 720,000 Total stockholders' equity $1,170,000 720,000 $1,120,000 Total liabilities and stockholders' equity $1,640,000 $1,660,000