Peoria Corp. just completed another successful year, as indicated by the following income statement:
For the Year Ended
December 31, 2012
Sales revenue $1,250,000
Cost of goods sold 700,000
Gross profit $ 550,000
Operating expenses 150,000
Income before interest and taxes $ 400,000
Interest expense 25,000
Income before taxes $ 375,000
Income tax expense 150,000
Net income $ 225,000
Presented here are comparative balance sheets:
December 31
2012 2011
Cash $52,000 $90,000 Accounts receivable 180,000 130,000
Inventory 230,000 200,000
Prepayments 15,000 25,000
Total current assets $ 477,000 $ 445,000
Land $ 750,000 $ 600,000
Plant and equipment 700,000 500,000
Accumulated depreciation (250,000) (200,000)
Total long-term assets $1,200,000 $ 900,000
Total assets $1,677,000 $1,345,000
Accounts payable $ 130,000 $ 148,000
Other accrued liabilities 68,000 63,000
Income taxes payable 90,000 110,000
Total current liabilities $ 288,000 $ 321,000
Long-term bank loan payable $ 350,000 $ 300,000
Common stock $ 550,000 $ 400,000
Retained earnings 489,000 324,000
Total stockholders' equity $1,039,000 $ 724,000
Total liabilities and stockholders' equity $1,677,000 $1,345,000
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.
Problem 12-4 Statement of Cash Flows-Indirect Method
Refer to all of the facts in Problem 12-3.
Required
1. Prepare a statement of cash flows for 2012 using the indirect method in the Operating Activities section.
2. On the basis of your statement in part (1), draft a brief memo to the president to explainwhy cash decreased during such a profitable year. Include in your explanation any recommendations for improving the company's cash flow in future years.