The integrating step: indirect operating cash flow from the statements you just built; then close
◈ 12 cardsPrepare 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.