The income statement for Astro Inc. for 2012 is as follows:
For the Year Ended
December 31, 2012
Sales revenue................................................$ 500,000
Cost of goods sold............................................400,000
Gross profit..................................................$ 100,000
Operating expenses...........................................180,000
Loss before interest and taxes...........................$ (80,000)
Interest expense................................................20,000
Net loss.....................................................$(100,000)
Presented here are comparative balance sheets:
December 31
2012 2011
Cash.............................$ 95,000..............$ 80,000
Accounts Receivable............50,000...............75,000
Inventory.........................100,000..............150,000
Prepayments.......................55,000...............45,000
Total current assets...........$ 300,000...........$ 350,000

Other information is as follows:
a. Dividends of $35,000 were declared and paid during the year.
b. Operating expenses include $70,000 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. He is disturbed with the $100,000 net loss 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 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 increased during such an unprofitable year. Include in your memo your recommendations for improving the company's bottom line.

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December 31 2012 2011 Land Plant and equipment Accumulated depreciation $ 475,000 400,000 800,000 (300,000 $ 975,000 $ 900,000 $1,275,000 $1,250,000 $ 125,000 100,000 45,000 10,000 $ 175,000 155,000 $ 340,000 250,000 $ 450,000 400,000 445,000 $ 760,000 845,000 $1,275,000 $1,250,000 870,000 (370,000) Total long-term assets Total assets Accounts payable Other accrued liabilities Interest payable 35,000 15,000 Total current liabilities Long-term bank loan payable Common stock Retained earnings Total stockholders' equity 310,000 Total liabilities and stockholders' equity