"See, I told you things would work out, said Barry Kresmier, president of Lomax Company. We expanded sales from $1.6 million to $2.0 million in 2016, nearly doubled our warehouse space, and ended the year with more cash in the bank than we started with. A few more years of expansion like this and we'll be the industry leaders. Yes, I'll admit our statements look pretty good, replied Sheri Colson, the company's vice president. But we're doing business with a lot of companies we don't know much about and that worries me. I'll admit, though, that we're certainly moving a lot of merchandise; our inventory is actually down from last year. A comparative balance sheet for Lomax Company containing data for the last two years follows: Lomax Company Comparative Balance Sheet December 31, 2016 and 2015 2016 2015 Assets Current assets: Cash........... Marketable securities. Accounts receivable... Inventory ............. Prepaid expenses ...... Total current assets... Long-term investments ...... Loans to subsidiaries.......... Plant and equipment ........... Less accumulated depreciation .... Net plant and equipment Patents .......................... Total assets ....................... $ 42,000 19.000 710,000 848,000 10.000 1.629.000 60,000 130.000 3.170,000 810,000 2,360,000 84,000 54.263.000 $ 27,000 13,000 530,000 860,000 5,000 1.435.000 110.000 80,000 2,600,000 755,000 1.845,000 90.000 $3,560,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable......... Accrued liabilities......... Total current liabilities. Long-term notes ..... Deferred income taxes.... Total liabilities. S970,000 65,000 1.035.000 820.000 95,000 1,950,000 $ 670,000 82,000 752,000 600.000 80,000 1,432,000 Stockholders' equity: Common stock... Retained earnings Total stockholders' equity......... Total liabilities and stockholders' equity... 1.740.000 573,000 2.313,000 $4,263,000 1.650.000 478,000 2,128,000 53,560,000 The following additional information is available about the company's activities during 2016: a. Cash dividends declared and paid to the common stockholders totaled $75,000. b. Long-term notes with a value of $380,000 were repaid during the year. c. Equipment was sold during the year for $70,000. The equipment had cost $130,000 and had $40,000 in accumulated depreciation on the date of sale. d. Long-term investments were sold during the year for $110,000. These investments had cost $50,000 when purchased several years ago. e. The company's income statement for 2016 follows: $2,000,000 1,300,000 700.000 490,000 210.000 Sales ....... Cost of goods sold .. Gross margin..... Selling and administrative expenses... Net operating income Nonoperating items: Gain on sale of investments .... Loss on sale of equipment. ... Income before taxes Income taxes......... Net income ........ $60,000 20.000 40,000 250,000 80,000 $ 170.000 Required: 1. Using the indirect method, prepare a statement of cash flows for the year 2016. 2. Prepare a reconciliation of the operating activities using the direct method. 3. What problems relating to the company's activities are revealed by the statement of cash flows that you have prepared