The following is Service Company's two financial statements (in millions):

The following additiOnal Information is available:

i. operating expenses include $35 million of depreciation

ii. property and equipment were acquired for cash

iii. additional contributed equity was shares issued for cash

iv. additional cash was obtained by issuing bonds

v. dividends were paid.

The CEO has posed some questions regarding this year's results. She is pleased that the profit margin is approaching 15 per cent. However, the decrease in the cash balance during such a profitable year troubles her.

REQUIRED

a. Prepare a statement of cash flows for Service Company using the direct method for operating cash

flows. Prepare a separate schedule showing the reconciliation of profit after tax to cash flows from

operations.

b. Based on your work, explain to the CEO why cash decreased during a profitable year.

Income statement for the year ending 30 June 2019 Sales $ 750 450 $ 300 100 $ 200 15 $185 75 $ 110 Cost of goods sold Gross profit Operating expenses Income before interest and taxes Interest expense Income before taxes Income tax expense Profits Balance sheet as at 30 June 2019 Cash $ 45 Accounts receivable 155 Inventory 225 Prepaid insurance 22 Total current assets $447 Property and equipment 1250 Accumulated depreciation (175) Total property and equipment $1075 Total assets $1522 Accounts payable $ 120 Income taxes payable 155 Total current liabilities $ 275 Bonds payable 400 Total liabilities $ 675 Contributed equity 525 Retained earnings 322 Total shareholders' equity $ 847 Total liabilities and equity $1522 2018 $ 80 115 190 32 $417 1050 (140) $ 910 $1327 $ 135 175 $ 310 325 $ 635 475 217 $ 692 $1327