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

Presented here are comparative balance sheets:

Other information is as follows:
a. Dividends of $60,000 were declared and paid during the year.
b. Operating expenses include $50,000 of depreciation.
c. Land and plant and equipment were acquired for cash, and additional stock was issued for cash. Cash also was received from additional bank loans. The president has asked you some questions about the year€™s results. She is very impressed with the profit margin of 18% (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 $50,000.
Required
1. Prepare a statement of cash flows for 2010 using the direct method in the Operating Activities section.
2. On the basis of your statement in (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 futureyears.

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For the Year Ended December 31, 2010 Sales revenue Cost of goods sold $1,250,000 700,000 S 550,000 150,000 S 400,000 Gross profit Operating expenses Interest expense Income tax expense Income before interest and taxes Income before taxes S 375,000 150,000 S 225,000 Net income Total current assets Accumulated depreciation Total long-term assets 1,200,000 Total assets December 31 Other accrued liabilities Income taxes payable Total current liabilities Long-term bank loan payable 350,000 Total stockholders' equity Total liabilities and stockholders' equity