Wabash Corp. just completed another successful year, as indicated by the following income statement:
For the Year Ended
December 31, 2012
Sales revenue...................................................$2,460,000
Cost of goods sold..............................................1,400,000
Gross profit............................................$1,060,000
Operating expenses................................................460,000
Income before interest and taxes.....................$ 600,000
Interest expense...................................................100,000
Income before taxes...................................$ 500,000
Income tax expense...............................................150,000
Net income.............................................$ 350,000
Presented here are comparative balance sheets:

Other information is as follows:
a. Dividends of $350,000 were declared and paid during the year.
b. Operating expenses include $25,000 of depreciation.
c. Land was sold for its book value, and new plant and equipment were acquired for cash.
d. Part of the bank loan was repaid, and additional common stock was issued for cash.
The president has asked you some questions about the year's results. She is very impressed with the profit margin of 14% (net income divided by sales 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 $100,000.
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 company's cash flow in future years.

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December 31 2012 2011 Cash Accounts receivable Inventory Prepayments S 140,000 210,000 145,000 180,000 25,000 $ 415,000 560,000 S 600,000 700,000 600,000 (200,000 $1,225,000 $1,100,000 $1,640,000 $1,660,000 $ 140,000 $ 120,000 55,000 115,000 $ 270,000 290,000 $ 200,000 250,000 S 450,000 $ 400,000 720,000 $1,170,000 $1,120,000 Total liabilities and stockholders' equity S1,640,000 S1,660,000 60,000 200,000 15,000 Total current assets Land Plant and equipment Accumulated depreciation 850,000 (225,000) Total long-term assets Total assets Accounts payable Other accrued liabilities Income taxes payable 50,000 80,000 Total current liabilities Long-term bank loan payable Common stock Retained eanings 720,000 Total stockholders' equity