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A comparative balance sheet for Sarasota Corporation is presented as follows. December 31 Assets 2020 2019...

A comparative balance sheet for Sarasota Corporation is presented as follows.

	December 31
Assets	2020		2019
Cash	$ 72,680		$ 22,000
Accounts receivable	84,360		68,680
Inventory	182,360		191,680
Land	73,360		112,680
Equipment	262,360		202,680
Accumulated Depreciation-Equipment	(71,360	)	(44,680	)
Total	$603,760		$553,040
Liabilities and Stockholders' Equity
Accounts payable	$ 36,360		$ 49,680
Bonds payable	150,000		200,000
Common stock ($1 par)	214,000		164,000
Retained earnings	203,400		139,360
Total	$603,760		$553,040

Additional information:

1.		Net income for 2020 was $129,720. No gains or losses were recorded in 2020.
2.		Cash dividends of $65,680 were declared and paid.
3.		Bonds payable amounting to $50,000 were retired through issuance of common stock.

Prepare a statement of cash flows for 2020 for Sarasota Corporation. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

Determine Sarasota Corporation’s current cash debt coverage, cash debt coverage, and free cash flow. (Round current cash debt coverage and cash debt coverage to 2 decimal places., e.g. 0.67.)

Current cash debt coverage		:1
Cash debt coverage		:1
Free cash flow	$

Comment on its liquidity and financial flexibility.

Sarasota has

liquidity. Its financial flexibility is .

Expert Solution

Part A

Sarasota Corporation statement of cash flows For the year ended 31, 2020
Cash flows from operating activities
Net income		129720
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense (71360-44680)	26680
Increase in accounts receivable (68680-84360)	(15680)
Decrease in inventory (191680-182360)	9320
Decrease in accounts payable (36360-49680)	(13320)	7000
Net cash provided by operating activities		136720
Cash flows from investing activities
Sale of land (112680-73360)	39320
Purchase of equipment (202680-262360)	(59680)
Net cash used by investing activities		(20360)
Cash flows from financing activities
Payment of cash dividends		(65680)
Net increase in cash		50680
Cash at beginning of year		22000
Cash at end of year		72680

Noncash investing and financing activities

Issued common stock to retire $50,000 of bonds outstanding

Part B

Current cash debt coverage = Net cash provided by operating activities / Average current liabilities = 136720/((36360+49680)/2) = 3.18 : 1

Cash debt coverage = Net cash provided by operating activities/Average total liabilities = 136720/((36360+150000+49680+200000)/2) = 0.63:1

Free Cash Flow Analysis

Free Cash Flow Analysis
Net cash provided by operating activities	136720
Less: Purchase of equipment	(59680)
Dividends	(65680)
Free cash flow	$11360

Sarasota has excellent liquidity. Its financial flexibility is good.

It can be observed that it has substantially reduced its long-term debt in 2020 which helped it to improve financial flexibility.

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