The income statement for Pluto Inc. for 2012 is as follows:
For the Year Ended
December 31, 2012
Sales revenue.......................................................$350,000
Cost of goods sold..................................................150,000
Gross profit.........................................................$200,000
Operating expenses.................................................250,000
Loss before interest and taxes..................................$ (50,000)
Interest expense......................................................10,000
Net loss ...........................................................$ (60,000)
Presented here are comparative balance sheets:

Other information is as follows:
a. Dividends of $84,000 were declared and paid during the year.
b. Operating expenses include $40,000 of depreciation.
c. Land and plant and equipment were acquired for cash. Cash was received from additional bank loans.
The president has asked you some questions about the year's results. He is disturbed with the net loss of $60,000 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.

December 31 2012 2011 Cash Accounts receivable Inventory Prepayments $ 25,000 S 10,000 0,000 80,000 100,000 100,000 35,000 $191,000 $225,000 $300,000 $200,000 500,000 250,000 (90,000) (50,000) $710,000 $400,000 $901,000 $625,000 S 50,000 S 10,000 20,000 12,000 $112,000 S 42,000 $450,000 $100,000 $300,000 $300,000 39,000 183,000 $339,000 $483,000 36,000 Total current assets Land Plant and equipment Accumulated depreciation Total long-term assets Total assets Accounts payable Other accrued liabilities Interest payable 40,000 22,000 Total current liabilities Long-term bank loan payable Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 01000 $625,000