Final answer:
The Insurance Expense for Year 1 is $1,600, while the Cash Flow from Operating Activities would show a cash outflow of $2,400 for the insurance premium. The remaining $800 is recorded as an asset on the balance sheet as prepaid insurance.
Step-by-step explanation:
On May 1 of Year 1, Matthew Company paid $2,400 for a one-year insurance policy. The insurance expense for Year 1 should be calculated from May 1 to December 31, which is eight months of coverage within the fiscal year that ends on December 31. To determine the insurance expense shown in Year 1 financial statements, we divide the total cost of the policy by the number of months in a year (12) and then multiply by the number of months of coverage in Year 1 (8).
Insurance Expense = ($2,400 / 12 months) x 8 months = $200 x 8 = $1,600
The Insurance Expense for Year 1 is $1,600. The remaining $800 ($2,400 - $1,600) is considered prepaid insurance and is recorded as an asset on the balance sheet at the end of Year 1. The Cash Flow from Operating Activities related to the insurance policy would show the full payment amount of $2,400 as it represents the cash outflow for the insurance premium during Year 1.