1.Prepare a statement of cash flows for 2010 using the direct method in the oper

Question

1.Prepare a statement of cash flows for 2010 using the direct method in the operating activites section.......

2. On the bases 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 inproving the companys cash flow in future years.

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%u2019s 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%u2019s cash balance during the year. One of the conditions of the existing bank loan is that the company maintains a minimum cash balance of $50,000.

Required

1. Prepare a statement of cash flows for 2012 using the direct (and 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 explain why cash decreased during such a profitable year. Include in your explanation any recommendations for improving the company%u2019s cash flow in future years.

NOTE: The original answer to this is wrong/incomplete (so don't copy and paste it).

Prepare a statement of cash flows for 2010 using the direct method in the operating activities section....... On the bases 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 companies cash flow in future years. Dividends of $60,000 were declared and paid during the year. Operating expenses include $50,000 of depreciation. 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%u2019s 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%u2019s cash balance during the year. One of the conditions of the existing bank loan is that the company maintains a minimum cash balance of $50,000. Prepare a statement of cash flows for 2012 using the direct (and indirect) method in the Operating Activities section. On the basis of your statement in part (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%u2019s cash flow in future years.

Explanation / Answer

cash decreased during such a profitable year because the land, plant and equipment ,all these fixed assets were purchased in cash which results in outflow of cash and so cash decreases..

The company should purchase the fixed asset in credit so that the cash can be used in day to day activities thus increasing production which will result in cash flow in future years..

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