Cash Flow From Operations. "Net income is fine-over 10 percent of sales!" exclaims the president of Armitage Parts Company. "But I want to know why we have to reduce our cash balance just to pay our bills on time." An income statement for 1999 for Armitage Parts Company follows:

Depreciation of \(\$ 147,000\) is part of operating expenses. Current assets and current liabilities as of December 31, 1998 and 1999, are:

Dividends of \(\$ 400,000\) were declared in 1999. A new building was constructed at a cost of \(\$ 850,000\). A mortgage of \(\$ 290,000\) was obtained to make the final payment to the building contractor. No other transactions affected these accounts.
\section*{Required:}
1. Prepare a statement of cash flows. Show the cash-flow effect of each item on the income statement.
2. Is the president's concern about the cash position justified? Explain.

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Income Statement for the Year Ended December 31, 1999 Net sales Cost of goods sold. Operating expenses Income taxes. Total expenses. Net income $5,230,000 $2,890,000 940,000 630,000 $ 4,460,000 $ 770,000