The income statement for Pluto Inc. for 2017 is as follows:

.................................................................For the Year Ended December 31, 2017

Sales revenue ...................................................................................$350,000

Cost of goods sold ..............................................................................150,000

Gross profit ....................................................................................$200,000

Operating expenses ..............................................................................250,000

Loss before interest and taxes ...............................................................$ (50,000)

Interest expense ...................................................................................10,000

Net loss .........................................................................................$ (60,000)

Presented here are comparative balance sheets:

Other information is as follows:
a. Dividends of $84,000 were declared and paid during the year.
b. Operating expenses include $40,000 of depreciation.
c. Land and plant and equipment were acquired for cash. Cash was received from additional bank loans.
The president has asked you some questions about the year's results. He is disturbed with the net loss of $60,000 for the year. He notes, however, that the cash position at the end of the year is improved. He is confused about what appear to be conflicting signals: ''How could we have possibly added to our bank accounts during such a terrible year of operations?''
Required
1. Prepare a statement of cash flows for 2017 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 increased during such an unprofitable year. Include in your memo your recommendations for improving the company's bottom line.

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Accounts receivable Total current assets Accumulated depreciation Total long-tem assets Accounts payable Other accrued liabilities Interest payable Total current liabilities Long-tem bank loan payable Retained eamings Total stockholders' equity Total liabilities and stockholders' equity