Net income → RE → balance sheet; cash → the cash flow statement

Four statements, three links

The statements are not four separate reports; they are one set, joined by three numbers.

• Net income is the last line of the income statement and the second line of the statement of retained earnings.
• Closing retained earnings is the last line of the statement of retained earnings and one line of equity on the balance sheet.
• Closing cash is the last line of the cash flow statement and the first line of the balance sheet.

The cash flow statement is built in Module 13, but you need its shape now: it explains the change in cash over the period under three activities — operating (cash from customers, cash to suppliers and employees, interest and taxes), investing (buying and selling long-lived assets), and financing (loans and shares raised or repaid, dividends paid). Its last line, cash at the end of the period, must equal the cash on the balance sheet.

Worked example — four Northlake items traced end to end

Wages of $9,600 paid. Income statement: Wages expense 9,600, so net income is 9,600 lower → statement of retained earnings: net income 9,600 lower, so closing RE is 9,600 lower → balance sheet: retained earnings 9,600 lower and cash 9,600 lower. Cash flow statement: an operating outflow of 9,600. All four statements, through two links.

A $20,000 dividend declared in December, paid in January. Income statement: nothing — a dividend is not an expense. Statement of retained earnings: dividends declared 20,000, closing RE 20,000 lower. Balance sheet at 31 December: retained earnings 20,000 lower, Dividends Payable 20,000 higher, cash unchanged. Cash flow statement for this year: nothing, because no cash moved; next year, a financing outflow of 20,000 when it is paid.

The groomer bought for $96,000 on account. Income statement: nothing today (amortization will come, in Module 5). Statement of retained earnings: nothing. Balance sheet: PP&E up 96,000, accounts payable up 96,000. Cash flow statement: nothing yet — the investing outflow appears when the payable is paid.

Season passes, $30,000 received in November for December–March. Income statement in November: nothing. Balance sheet at 30 November: cash up 30,000, unearned revenue (liability) up 30,000. Cash flow statement: operating inflow 30,000. Then, each month from December, $7,500 leaves unearned revenue and enters revenue on the income statement — and from there follows the wages path into retained earnings.

The year-end arithmetic

Pinegrove Trail Club Inc. (the older company from L3.1): opening retained earnings 140,000, net income 58,300, dividends declared 20,000. Closing RE = $140,000+58,300-20,000=178,300$; the change in RE is $178,300-140,000=38,300$, which is also $58,300-20,000$. Opening cash 180,000, net decrease in cash for the year 41,700 (from the cash flow statement): closing cash = $180,000-41,700=138,300$, which must be the cash line on the balance sheet. When a case gives you an incomplete statement set, these two chains are how you fill the blanks.

Routing twelve items