Question

The comparative balance sheets of Pronghorn Corporation at the beginning and end of the year 2020 appear below. Inc./Dec. PRONGHORN CORPORATION BALANCE SHEETS Dec. 31, 2020 Jan 1, 2020 Assets Cash $22,120 $14,770 Accounts receivable 108,120 89,770 Equipment 41,120 23,770 Less: Accumulated Depreciation-Equipment (17,000) (11,000) Total $154,360 $117,310 Liabilities and Stockholders' Equity Accounts payable $22,120 $16,770 Common stock 102,120 81,770 Retained earnings 30,120 18,770 Total $154,360 $117,310 $7,350 Inc. 18,350 Inc. 17,350 Inc. 6,000 Inc. 5,350 Inc. 20,350 Inc. 11,350 Inc. Net income of $46,120 was reported, and dividends of $34,770 were paid in 2020. New equipment was purchased and none was sold.

Answer 1

Statement of Cash flows:

PRONGHORN CORPORATION
Statement of Cash Flows
For the Year Ended December 31,2020
Cash Flows from Operating activities:
Net income		$46,120
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation expense	$6,000
Increase in accounts receivable	($18,350)
Increase in accounts payable	$5,350	($7,000)
Net cash provided (used) by operating activities (i)		$39,120
Cash flows from investing activities:
Purchase of equipment                                                              (ii)		($17,350)
Cash flows from financing activities:
Cash paid for dividends	($34,770)
Issuance of common stock	$20,350
Net cash provided (used) by financing activities (iii)		($14,420)
Net increase(decrease) in cash (i+ii+iii)		$7,350
Cash balance, Dec 31,2019		$14,770
Cash balance, Dec 31,2020		$22,120

Current Ratio:

	December 31,2020	January 1,2020
Current Ratio	5.9	6.2

Calculations:

	December 31,2020	January 1,2020
Cash	$22,120	$14,770
Accounts receivable	$108,120	$89,770
Total current assets (i)	$130,240	$104,540
Accounts payable	$22,120	$16,770
Total current liabilities (ii)	$22,120	$16,770
Current Ratio (i/ii)	$5.9	$6.2

Free Cash flows:

Free cash flows = Cash flows from operating activities - Capital expenditure

= $39,120 - $17,350

= $21,770

Analysis:

Pronoghorn company has higher liquidity and higher financial flexibility because current ratio is more than 2