Na pašnjaku smo vidjeli ovcu s crnim licem i janje pokraj nje.

Because na pašnjaku is in the locative case, which is used after na when it means on / in / at a place.

• pašnjak = pasture
• na pašnjaku = on the pasture / in the pasture

If na expressed movement toward a place, you would often get the accusative instead. Here there is no movement; it describes location.

Smo vidjeli is the past tense form meaning we saw.

Croatian often forms the past tense with:

• a short form of biti (sam, si, je, smo, ste, su)
• plus the l-participle

So here:

• smo = we are/have, the auxiliary
• vidjeli = seen/saw, the participle

Together: smo vidjeli = we saw

This is normal Croatian past tense structure.

The ending in vidjeli agrees with the subject, which is we.

This form is used for:

• masculine plural
• or a mixed-gender group

So mi smo vidjeli means:

• we saw if the group includes at least one male, or
• if the group is grammatically treated as masculine plural

If the speakers were all female, it would be:

• smo vidjele

Because ovcu is the accusative singular form of ovca.

The verb vidjeti takes a direct object, and direct objects are often in the accusative.

• nominative: ovca = a sheep
• accusative: ovcu = a sheep (as the thing seen)

So:

• vidjeli smo ovcu = we saw a sheep

Here s means with, and after s in this meaning, Croatian uses the instrumental case.

So:

• crno lice = a black face
• instrumental: crnim licem = with a black face

This phrase describes the sheep:

• ovcu s crnim licem = a sheep with a black face

Because both words must be in the instrumental singular.

Base form:

• crno lice = black face

Instrumental singular:

• crnim = black
• licem = face

Croatian adjectives must agree with the noun in:

• gender
• number
• case

Since lice is neuter singular, the adjective changes to match it in the instrumental:

• s crnim licem

Because janje is a neuter noun, and in the singular, the nominative and accusative are often the same.

So:

• nominative: janje = lamb
• accusative: janje = lamb

Since it is the direct object after vidjeli, it is accusative here, but it looks the same as the basic dictionary form.

Pokraj nje means next to her / beside it.

The preposition pokraj requires the genitive case.

The pronoun refers back to ovca:

• nje = her / it, in the genitive form

So:

• janje pokraj nje = the lamb next to her

Because ovca is grammatically feminine, the pronoun is feminine too.

Grammatically, it is the feminine pronoun form, so literally it matches her. But in English, because it refers to an animal, the translation could be her or it, depending on context and style.

In Croatian, the pronoun follows the grammatical gender of ovca, which is feminine.

Because Croatian often omits subject pronouns when the verb already shows who is doing the action.

Here smo vidjeli already tells us the subject is we.

So:

• Na pašnjaku smo vidjeli... = On the pasture, we saw...

You could add mi for emphasis:

• Na pašnjaku smo mi vidjeli...

But normally it is unnecessary.

Yes. Croatian word order is fairly flexible.

This sentence could also appear as:

• Vidjeli smo ovcu s crnim licem i janje pokraj nje na pašnjaku.
• Na pašnjaku vidjeli smo ovcu s crnim licem i janje pokraj nje.

The original order is natural because it starts with the setting:

• Na pašnjaku = on the pasture

Also, the auxiliary smo often appears in second position, which is very common in Croatian sentence structure.

Normally it describes only ovcu.

So the structure is understood as:

• ovcu s crnim licem
• i janje pokraj nje

That means:

• a sheep with a black face
• and a lamb next to her

If the sentence meant that both had black faces, Croatian would usually phrase it more clearly in a different way.