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

LO5 For the Year Ended December 31, 2010 Sales revenue $2,460,000 Cost of goods sold 1,400,000 Gross profi t $1,060,000 Operating expenses 460,000 Income before interest and taxes $ 600,000 Interest expense 100,000 Income before taxes $ 500,000 Income tax expense 150,000 Net income $ 350,000.

Presented here are comparative balance sheets:

December 31 2010 2009 Cash $ 140,000 $ 210,000 Accounts receivable 60,000 145,000 Inventory 200,000 180,000 Prepayments 15,000 25,000 Total current assets $ 415,000 $ 560,000 Land $ 600,000 $ 700,000 Plant and equipment 850,000 600,000 Accumulated depreciation (225,000) (200,000)
Total long-term assets $1,225,000 $1,100,000 Total assets $1,640,000 $1,660,000 Accounts payable $ 140,000 $ 120,000 Other accrued liabilities 50,000 55,000 Income taxes payable 80,000 115,000 Total current liabilities $ 270,000 $ 290,000 Long-term bank loan payable $ 200,000 $ 250,000 Common stock $ 450,000 $ 400,000 Retained earnings 720,000 720,000 Total stockholders’ equity $ 1,170,000 $1,120,000 Total liabilities and stockholders’
equity $ 1,640,000 $1,660,000.

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 were 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 profi t 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 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 decreased during such a profi table year. Include in your explanation any recommendations for improving the company’s cash fl ow in future years.AppendixLO1