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

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

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 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 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 2017 2016 S140,000 210,000 145,000 Cash Accounts receivable nventory Prepayments 60,000 25,000 415,000 560,000 600,000 (200,000) 15,000 Total current assets Plant and equipment Accumulated depreciation (225,000) Total long-term assets 1,225,000 $1,100,000 Total assets $1,640,000 $1,660,000 140,000 120,000 55,000 115,000 270,000 290,000 S 200,000 $ 250,000 450,000 400,000 720,000 Accounts payable Other accrued liabilities Income taxes payable 50,000 80,000 Total current liabilities Long-term bank loan payable Common stock Retained eamings 720,000 Total stockholders' equity Total liabilities and stockholders' equity $1,640,000 $1,660,000