Question

When using the indirect method to determine cash flows from operating activities, an increase in prepaid expenses should be reported as:
a. Not reported.
b. A deduction from net income in determining cash flows from operating activities.
c. An investing ectivity.
d. An addition to the net income in determining cash flows from operating activities.

Answer 1

Answer:

b. A deduction from net income in determining cash flows from operating activities.

Explanation:

An increase in prepaid expenses is deducted from Net Income. The reason behind it very simple and no rocket science is there. Lets take Insurance as a prepaid expense. You Paid in-advance for Insurance, it increase your current asset that is Prepaid Insurance BUT at the same time cash went out of the Business.

I hope I made it clear to you. If you still have any queries, feel free to ask me.

Thanks!