Reid Company's balance in prepaid insurance at the beginning and end of the year was $1,000 and $1,200, respectively. This will be reported on the statement of cash flows using the indirect method as:

a. a decrease of $200 which will be added to net income

b. an increase of $200 which will be subtracted from net income

c. an increase of $200 which will be added to net income

d. a decrease of $200 which will be subtracted from net income

Question

Business

Lorelei Harrison

23 April, 10:08

Reid Company's balance in prepaid insurance at the beginning and end of the year was $1,000 and $1,200, respectively. This will be reported on the statement of cash flows using the indirect method as:

a. a decrease of $200 which will be added to net income

b. an increase of $200 which will be subtracted from net income

c. an increase of $200 which will be added to net income

d. a decrease of $200 which will be subtracted from net income

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Answers (1)

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Beautiful · Answer 1

b. an increase of $ 200 which shall be subtracted from net income.

Explanation:

The difference between the opening and closing balances is an increase in the prepaid expense account.

The prepaid expense is an asset account and an increase indicates that cash has been spent on acquiring the asset and thus it is considered as an application of cash and thus reduced from the net income.