The integrating step: indirect operating cash flow from the statements you just built; then close
Prepare the operating section by the indirect method from the case’s own income statement and the two balance sheets, close the year in four entries, and prove the post-closing trial balance.
The operating section from the case you built
Module 13 built the operating section from a case that handed over two balance sheets. The final hands over a trial balance and last year’s balances, and the statements you built in L14.2 and L14.3 are the inputs. Net income 155,280; the only non-cash item is amortization 30,000 (the 700 write-down and the 1,800 bad debts are absorbed by the inventory and net-receivable changes); no disposals. Then each working-capital account, this year against last:
| Account | Prior | Now | Change | Cash effect |
|---|---|---|---|---|
| Accounts receivable, net | 33,100 | 39,300 | +6,200 | (6,200) |
| Inventory | 49,800 | 51,900 | +2,100 | (2,100) |
| Supplies | 1,900 | 2,100 | +200 | (200) |
| Prepaid insurance | 3,200 | 6,400 | +3,200 | (3,200) |
| Accounts payable | 26,300 | 29,700 | +3,400 | 3,400 |
| Salaries payable | 4,100 | 5,400 | +1,300 | 1,300 |
| Interest payable | 1,250 | 1,250 | 0 | 0 |
| Unearned revenue | 78,000 | 56,000 | −22,000 | (22,000) |
| Income tax payable | 2,900 | 26,820 | +23,920 | 23,920 |
Net of the nine: −5,080. Operating cash: 155,280 + 30,000 − 5,080 = 180,200.
Two of those lines are where marks are lost. Unearned revenue fell 22,000, and that is a use of cash — even though service revenue rose. The storage season’s cash arrived last year, when the liability was 78,000; this year Tamarack earned it down to 56,000 without collecting as much again. A liability that falls is subtracted, whatever the revenue line did. Income tax payable rose 23,920, from 2,900 to 26,820, and that is a source: tax expense was 38,820 but only 14,900 was paid — last year’s 2,900 and this year’s 12,000 of instalments. Nothing was “saved”; the payment is deferred to next year. The bank loan’s current portion, as always, is not a working-capital line.
Closing the year
With the statements done, the temporary accounts are emptied into retained earnings in the four steps of L6.4:
- Revenues to Income Summary. Dr Sales Revenue 312,000, Dr Service Revenue 517,600; Cr Income Summary 829,600.
- Expenses from Income Summary. Dr Income Summary 674,320; Cr each of the eleven expense accounts — cost of goods sold 219,100 down to income tax expense 38,820 (on the answer paper one compound entry; here in two parts, 616,900 and 57,420, because the widget takes eight lines at most).
- Income Summary to Retained Earnings. The balance is 829,600 − 674,320 = 155,280 credit — net income, again. Dr Income Summary 155,280; Cr Retained Earnings 155,280.
- Dividends to Retained Earnings. Dr Retained Earnings 24,000; Cr Dividends 24,000 — directly, never through Income Summary, because a dividend is not part of net income.
Retained Earnings: 258,550 + 155,280 − 24,000 = 389,830, the SRE’s figure. Accumulated Amortization is a permanent contra-asset and is never closed; nor is Unearned Revenue.
The post-closing trial balance
Only permanent accounts survive. Debits: Cash 47,300 · Accounts Receivable 42,000 · Inventory 51,900 · Supplies 2,100 · Prepaid Insurance 6,400 · Land 220,000 · Building 480,000 · Equipment 180,000 · Trademark 12,000 = 1,041,700. Credits: the allowance 2,700 · accumulated amortization 100,000 and 80,000 · the six liabilities 144,170 (with the loan still 150,000 in the ledger, its split being presentation only) · Common Shares 200,000 · Retained Earnings 389,830 = 1,041,700. No revenue, no expense, no Dividends, no Income Summary. The books are ready for 1 January.