Problem 12-3 (p. 654). Statement of Cash Flows

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

For the year ended

December 31, 2012

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

	2012	2011
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 years 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 companys 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 2012 using the direct method in the Operating Activities section.

2. 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 companys cash flow in future years.