On June 1, Year 1, Maverick Company paid $1,200 cash for an insurance policy that would protect the company for one year. The company's fiscal year ends on December 31. Based on this information, the amount of insurance expense and the cash flow from operating activities shown on the Year 1 financial statements would be

Question

Quizplus · Accepted Answer

The insurance policy covers the company for one year, which means the insurance expense for Year 1 will be $1,200/12 = $100 per month. Since the policy was purchased on June 1, there are seven months remaining in the fiscal year (June 1 to December 31), so the insurance expense for Year 1 will be $100 x 7 = $700.
 
The cash flow from operating activities will not be affected by the insurance policy since it was paid for in cash and is not a non-cash expense like depreciation. Therefore, the cash flow from operating activities on the Year 1 financial statements will not be affected by the insurance policy and will be the same as it would be without the insurance policy.

On June 1, Year 1, Maverick Company Paid $1,200 Cash