The income statement for Pluto Inc. for 2014 is as follows:
                                                                            For the Year Ended
                                                                            December 31, 2014
Sales revenue .......................................................$350,000
Cost of goods sold .................................................150,000
Gross profit ..........................................................$200,000
Operating expenses ..............................................250,000
Loss before interest and taxes ..........................$ (50,000)
Interest expense .......................................................10,000
Net loss .................................................................$ (60,000)

Presented here are comparative balance sheets:

Other information is as follows:
a. Dividends of $84,000 were declared and paid during the year.
b. Operating expenses include $40,000 of depreciation.
c. Land and plant and equipment were acquired for cash. Cash was received from additional bank loans.
The president has asked you some questions about the year€™s results. He is disturbed with the net loss of $60,000 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 2014 2013 $ 25,000 $ 10,000 Cash Accounts receivable 30,000 80,000 Inventory Prepayments 100,000 100,000 36,000 35,000 $225,000 Total current assets $191,000 Land $300,000 $200,000 Plant and equipment Accumulated depreciation Total long-term assets 250,000 500,000 (90,000) $710,000 (50,000) $400,000 Total assets $901,000 $625,000 $ 50,000 $ 10,000 Accounts payable Other accrued liabilities 40,000 20,000 Interest payable 22,000 $112,000 12,000 $ 42,000 Total current liabilities $450,000 $100,000 Long-term bank loan payable $300,000 Common stock $300,000 Retained earnings Total stockholders' equity 39,000 183,000 $339,000 $483,000 Total liabilities and stockholders' equity $901,000 $625,000