The income statement for Astro Inc. for 2014 is as follows:

                                                                                    For the Year Ended
                                                                                    December 31, 2014
Sales revenue ..................................................................$ 500,000
Cost of goods sold .............................................................400,000
Gross profit .....................................................................$ 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:

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 conflicting 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 flows for 2014 using the direct method in the Operating Activities section.
2. On the basis of your statement in part (1), draft a brief memo to the president to explain why cash increased during such an unprofitable year. Include in your memo your recommendations for improving the company€™s bottom line.

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December 31 2013 2014 $ 80,000 Cash 95,000 Accounts Receivable 75,000 50,000 Inventory Prepayments Total current assets 100,000 150,000 45,000 55,000 $ 350,000 $ 300,000 December 31 2014 2013 Land $ 475,000 $ 400,000 Plant and equipment Accumulated depreciation 870,000 800,000 (370,000) (300,000) $ 900,000 $1,250,000 $ 100,000 Total long-term assets $ 975,000 Total assets $1,275,000 Accounts payable $ 125,000 Other accrued liabilities 35,000 45,000 Interest payable 15,000 10,000 $ 175,000 $ 340,000 $ 450,000 $ 155,000 $ 250,000 $ 400,000 Total current liabilities Long-term bank loan payable Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 310,000 445,000 $ 760,000 $ 845,000 $1,275,000 $1,250,000