Question

A decrease in Prepaid Expenses indicates that ____ was expensed than paid. Thus the decrease will be ____ net income on the statement of cash flows prepared using the indirect method.

Answer 1

A decrease in Prepaid Expenses means more expenses were recognized than cash paid, and this decrease is added back to net income in the cash flow statement using the indirect method.

Step-by-step explanation:

A decrease in Prepaid Expenses indicates that more was expensed than paid. Thus the decrease will be added back to net income on the statement of cash flows prepared using the indirect method.

Prepaid Expenses are considered an asset because they represent future economic benefits that a company has paid for in advance. As these benefits are used or expire, the asset is reduced and an expense is recognized on the income statement.

The indirect method of cash flows starts with net income and adjusts for changes in balance sheet accounts to convert the accrual basis net income to a cash basis.

When there's a decrease in Prepaid Expenses, it means the expenses were recognized on the income statement, but no cash was actually paid out during the period; therefore, it's necessary to add back that decrease to net income to reflect the true cash position.

A decrease in Prepaid Expenses indicates that more was expensed than paid. Thus the decrease will be deducted from net income on the statement of cash flows prepared using the indirect method.