I took a look at the cash flow statement that my controller has prepared (Exhibit II). Even though I am not very good at reading financial statements, I was shocked. Im particularly concerned about our cash situation. We made approximately $155,000 before taxes and our sales increased by almost $126,000, yet our demand bank loan has almost quadrupled in the past year and we have little cash in the bank! I dont understand. You previously identified that we have weaknesses in our purchases, payables, and payments cycle. Could they have contributed to these cash flow problems? I suppose it is good that at least our sales process is fine! I kept the payment terms for our receivables at 60 days, which is standard for the industry. I would appreciate it if you would review the cash flow statement and prepare a memo to me explaining the key causes of the companys cash flow issues and demand bank loan situation. Be sure to consider the internal control weaknesses identified

Exhibit II Reach Higher Inc. Cash flow statement Year ended December 31

Operating activities

Net income $ 84,397 Add/(deduct) non-cash expenses/(revenues): Amortization per income statement 219,163 Amortization in cost of sales 326,625 Interest expense on leased asset 48,503 Gain on sale of investments (5,150) Change in accounts receivable (257,693) Change in inventory (257,245) Change in prepaids Change in accounts payable and accruals 234,017 Change in warranty accrual 55,819 Change in deferred revenue 156,500 Change in income tax payable (11,700) Cash provided by operating activities 593,236

Investing activities Acquisition of property, plant, and equipment (723,268) Acquisition of intangible assets (14,000) Proceeds on sale of temporary investments 35,000 Cash provided by investing activities (702,268)

Financing activities Dividends (48,750) Change in demand bank loan 278,622 Change in term loan (141,000) Change in other long-term liabilities 12,000 Cash provided by financing activities 100,872

Net increase/(decrease) in cash (8,160) Cash at beginning of year 12,720 Cash at end of year $ 4,560