Statement of Cash Flows—Direct Method The income statement for Astro Inc. for 2010 is as follows:

For the Year Ended December 31, 2010 Sales revenue $ 500,000 Cost of goods sold 400,000 Gross profi t $ 100,000 Operating expenses 180,000 Loss before interest and taxes $ (80,000)
Interest expense 20,000 Net loss $(100,000).

Presented here are comparative balance sheets:

December 31 2010 2009 Cash $ 95,000 $ 80,000 Accounts receivable 50,000 75,000 Inventory 100,000 150,000 Prepayments 55,000 45,000 Total current assets $ 300,000 $ 350,000 Land $ 475,000 $ 400,000 Plant and equipment 870,000 800,000 Accumulated depreciation (370,000) (300,000)
Total long-term assets $ 975,000 $ 900,000 Total assets $1,275,000 $1,250,000 Accounts payable $ 125,000 $ 100,000 Other accrued liabilities 35,000 45,000 Interest payable 15,000 10,000 Total current liabilities $ 175,000 $ 155,000 Long-term bank loan payable $ 340,000 $ 250,000 Common stock $ 450,000 $ 400,000 Retained earnings 310,000 445,000 Total stockholders’ equity $ 760,000 $ 845,000 Total liabilities and stockholders’
equity $1,275,000 $1,250,000.

Other information is as follows:

a. Dividends of $35,000 were declared and paid during the year.

b. Operating expenses include $70,000 of depreciation.

c. Land and plant and equipment were acquired for cash, and additional stock was issued for cash. Cash also was received from additional bank loans.
The president has asked you some questions about the year’s results. He is disturbed with the $100,000 net loss for the year. He notes, however, that the cash position at the end of the year is improved. He is confused about what appear to be confl icting signals:
“How could we have possibly added to our bank accounts during such a terrible year of operations?”

Required 1. Prepare a statement of cash fl ows for 2010 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 increased during such an unprofi table year. Include in your memo your recommendations for improving the company’s bottom line.AppendixLO1