The income statement for Pluto Inc. for 2010 is as follows:

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: €œHow 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 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 increased during such an unprofitable year. Include in your memo your recommendations for improving the company€™s bottomline.

For the Year Ended December 31, 2010 $350,000 Sales revenue Cost of goods sold Gross profit Loss before interest and taxes Net loss $200,000 $(50,000) $ (60,000) Operating expenses Interest expense Total current assets $225,000 Plant and equipment Accumulated depreciation Total long-term assets Total assets Other accrued liabilities Total current liabilities Retained earnings Total stockholders' equity Total liabilities and stockhoiders' equity 901,000