The following is Folex Company's income statement and balance sheet (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 common stock was 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 percent. However, the decrease in the cash balance during such a profitable year troubles her.
Required
a. Prepare a complete statement of cash flows for Folex using the direct method for operating cash flows. Prepare a separate schedule showing operating cash flows using the indirect method.
b. Based on the statement you prepare, explain to the CEO why cash decreased during a profitable year.

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Income Statement For the Year Ending 12/31/12 Sales S750 450 S300 100 $200 Cost of goods sold Gross profit Operating expenses Interest expense Income tax expense Income before interest and taxes Income before taxes $185 75 $110 Net income Balance Sheet December 31 2011 S 80 115 190 32 417 1,050 (175) (140) 910 S1,327 S 135 175 310 325 635 475 217 692 Cash Accounts receivable Inventory Prepaid insurance 2012 S 45 155 225 Total current assets Property and equipment Accumulated depreciation 447 1,250 1.075 1,522 S 120 155 275 400 675 525 322 847 Total property and equipment Total assets Accounts payable Income taxes payable Total current liabilities Bonds payable Total liabilities Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 1,522 1,327