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

.........................................................For the Year Ended December 31, 2014

Sales revenue ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,$ 1,250,000

Cost of goods sold .....................................................700,000

..........................................................................______________

.....Gross profit ...................................................$.... 550,000

Operating expenses ...................................................150,000

..........................................................................______________

.....Income before interest and taxes ....................$..... 400,000

Interest expense ..........................................................25,000

.........................................................................._______________

.....Income before taxes...................................... $..... 375,000

Income tax expense............................................. 150,000

..........................................................................________________

Net income ........................................................$..... 225,000

..........................................................................==============

Presented here are comparative balance sheets:

....................................................................................................December 31

..........................................................................................2014 ......................................2013

Cash.................................................................... $ ........52,000................................$.... 90,000

Accounts receivable .......................................................180,000.....................................130,000

Inventory .......................................................................230,000.....................................200,000

Prepayments....................................................................15,000.......................................25,000

...................................................................................____________...........................____________

.....Total current assets .........................................$........477,000...............................$.....445,000

.................................................................................._____________.........................._____________

Land.....................................................................$.........750,000..............................$.....600,000

Plant and equipment.........................................................700,000.....................................500,000

Accumulated depreciation................................................(250,000).................................. (200,000)

..................................................................................._____________.........................._____________

.....Total long-term assets.......................................$.......1,200,000.............................$.....900,000

..................................................................................______________.........................______________

..........Total assets.................................................$.......1,677,000.............................$...1,345,000

...............................................................................=============..........................=============

Accounts payable...................................................$..........130,000............................ $......148,000

Other accrued liabilities.........................................................68,000......................................63,000

Income taxes payable......................................................... 90,000.....................................110,000

......................................................................................___________..............................__________

.....Total current liabilities........................................ $.......... 288,000 ...........................$ ......321,000

......................................................................................____________............................___________

Long-term bank loan payable................................... $.......... 350,000............................$.......300,000

......................................................................................___________.............................____________

Common stock....................................................... $.......... 550,000........................... $........400,000

Retained earnings.................................................................489,000......................................324,000

......................................................................................___________............................_____________

.....Total stockholders equity ...................................$.........1,039,000 ..........................$........ 724,000

......................................................................................____________..........................._____________

..........Total liabilities and stockholders equity........... $.........1,677,000......................... $........1,345,000

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 te company maintain a minimum cash balance of $10,000.

Questions:

1. Prepare a statement of cash flows for 2014 using the direct method in the Operating Activities section.

2. Prepare another statement of cash flows for 2014 using the indirect method in the Operating Activities section.

3. On the basis of your statement in part (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.

4. On the basis of your statement in part (2), 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.