Satellite was found in 2019 to apply a new technology for producing an electronic chip. The company earned a profit of $115,000 in 2019, its first year of operations. In 2020, the company began dramatically expanding its customer base. Management expects both sales and profit increase significantly in the coming few years.

Comparative statements of financial position at the end of 2020 and 2019, the companys first two years of operations follow.

Satellite CompanyFinancial Position at 31 December

2020. 2019

Assets

Cash $ 123,000. $ 193,000

Accounts receivable. 840,000. 150,000

Equipment Accumulated depreciation 2,800,000 (340,000) 620,000 ( 62,000)

Prepaid insurance. 25,000. 17,500

Total 3,448,000 $918,500

Equity and Liabilities

Share capital$ 560,000 $400,000

Retained earnings 655,000 115,000

Notes payable (short-term). 740,000. 390,000

Bond payable (long-term). 1,450,000. 0

Accounts payable 43,000 13,500

Total. $3,448,000. $918,500

Additional information for 2020:

(1)Profit for 2020 was $540,000. The company has never paid a dividend

(2)Depreciation expense for the year amount to $280,000.

(3)During the year the company purchased modern equipment costing $2,200,000, for whish $1,850,000 in cash and financed $350,000 by issuing a short-term bond payable. The equipment is expected to meet increasing demand in the coming years.

(4)Equipment with a cost of $20,000 and accumulated depreciation of $2,000 was sold for $5,000 cash. (5)In 2020, the company raised fund to buy the equipment by issue of bond $1,450,000 to investors and promised to pay back in 2025. In addition, the company has a $1 million line of credit with a local bank, guaranteed by its equipment.

(6)Additional ordinary shares were issued to existing shareholders $160,000.

Required

(a)Prepare a statement of cash flows for the year ended 2020, using the indirect method.

(b)Briefly explain how the companys cash balance decrease at end of 2020 when the company is operating profitability.

(c)Because of the expected rapid growth, management forecasts the operating activities will be an even greater use of cash in the coming two years. If this forecast is correct, does Satellite appear to be heading toward illiquidity? Explain.