Question

The Dalen Company paid $3,500 for a one year insurance policy on July 1, 2015. The amount of expense shown on the income statement and the amount of cash outflow from operating activities shown of the statement of cash flows at the end of 2015 would be:

-Income Statement Statement of Cash Flows
$3,500 $3,500
-Income Statement Statement of Cash Flows
$1,750 $1,750
-Income Statement Statement of Cash Flows
$1,750 $3,500
-Income Statement Statement of Cash Flows
$0 $1,750

Answer 1

On the income statement, the expense for Dalen Company's one-year insurance policy would be $1,750 for 2015, while the statement of cash flows would show a cash outflow of $3,500.

Step-by-step explanation:

The Dalen Company paid $3,500 for a one-year insurance policy on July 1, 2015. When preparing the financial statements for the year ending December 31, 2015, it is important to recognize that only half of the policy has been 'used' during this time, as the policy covers from July 2015 to June 2016. On the income statement, the company should recognize an expense of $1,750 for the period (6/12 months of the policy cost), reflecting the insurance cost applicable to 2015. However, the entire amount of $3,500 was paid in cash when the policy was purchased. Hence, in the statement of cash flows, the cash outflow from operating activities will be $3,500 as this reflects the actual cash paid during the period.