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, 2010. The following items were included on Carpetland’s balance sheet at December 31, 2010 and 2009:

12/31/10 12/31/09 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 fl ows. Carpetland does not have any other current assets or current liabilities, and did not enter into any investing or fi nancing activities during 2010.

Required 1. Prepare Carpetland’s 2010 statement of cash fl ows.

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

AppendixLO1