Peoria Corp. just completed another successful year, as indicated by the following income statement:

Presented here are comparative balance sheets:

Other information is as follows:

a. Dividends of $60,000 were declared and paid during the year.

b. Operating expenses include $50,000 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. She is very impressed with the profit margin of 18% (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 maintains a minimum cash balance of $50,000.

Required

1. Prepare a statement of cash flows 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 profitable year. Include in your explanation any recommendations for improving the company?s cash flow in future years.

Sales revenue Cost of goods sold Gross profit Operating expenses Income before interest and taxes Interest expense Income before taxes Income tax expense Net income For the Year Ended December 31, 2010 $1,250,000 700,000 $ 550,000 150,000 $400,000 25,000 $375,000 150,000 $ 225,000 Cash Accounts receivable Inventory Prepayments Total current assets Land Plant and equipment Accumulated depreciation Total long-term assets Total assets Accounts payable Other accrued liabilities Income taxes payable Total current liabilities Long-term bank loan payable Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ December 31 2010 52,000 180,000 230,000 15,000 $ 477,000 $ 750,000 700,000 (250,000) $ 1,200,000 $ 1,677,000 2010 $ 130,000 68,000 90,000 $288,000 $ 350,000 $ 550,000 489,000 $ $1,039,000 $1,677,000 2009 December 31 90,000 130,000 200,000 25,000 $ 445,000 $ 600,000 500,000 (200,000) $ 900,000 $1,345,000 2009 $ 148,000 63,000 110,000 $ 321,000 $ 300,000 $ 400,000 324,000 $ 724,000 $1,345,000