An increase in the Prepaid Expenses account of $1,000 over the course of a year would be shown on the company's statement of cash flows prepared under the indirect method as:
A)an addition to net income of $1,000 in order to arrive at net cash provided by operating activities.
B)a deduction from net income of $1,000 in order to arrive at net cash provided by operating activities.
C)an addition of $1,000 under financing activities.
D)a deduction of $1,000 under financing activities.

Question

Quizplus · Accepted Answer

An increase in Prepaid Expenses represents a use of cash, as it indicates that the company has paid for expenses in advance of their actual use. Therefore, it should be deducted from net income when arriving at net cash provided by operating activities in the statement of cash flows prepared under the indirect method.

An Increase in the Prepaid Expenses Account of $1,000 Over