Pickering Company's prepaid insurance was $8,000 at December 31, 2012, and $10,000 at December 31, 2013. Pickering reported insurance expense of $15,000 on the 2013 income statement. What amount would be reported in the statement of cash flows as insurance paid using the direct method?

Question

Quizplus · Accepted Answer

To determine the amount of insurance paid using the direct method, we need to find the change in the prepaid insurance balance during the year and adjust for any non-cash expenses.

Change in prepaid insurance balance = $10,000 - $8,000 = $2,000 (increase)

Insurance expense reported on the income statement = $15,000

Adjusting for non-cash expense:

Increase in prepaid insurance balance = $2,000

Insurance paid = Insurance expense - Increase in prepaid insurance balance

Insurance paid = $15,000 - $2,000 = $13,000

Therefore, the amount reported in the statement of cash flows as insurance paid using the direct method would be $17,000.

Pickering Company's Prepaid Insurance Was $8,000 at December 31, 2012