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 the 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 maintain a minimum cash balance of $50,000.

Required:

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 on part (1), draft a brief memo to the president to explain why cash decreased during the 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 on part (2), draft a brief memo to the president to explain why cash decreased during the profitable year. Include in your explanation any recommendations for improving the company's cash flow in future years.