This is the indirect method for statement of cash flows

Accounting Nov 02, 2020

This is the indirect method for statement of cash flows. I am confused because for "decrease in prepaid insurance" don't I have to subtract the $1,550 from net income? Do I add the $1550 back to net income because technically if there is a decrease in prepaid insurance, then that means prepaid expense increased so is that the reason I have to add it back to net income since no cash was involved? I thought there was cash involved considering it is prepaid insurance and that means a company paid cash in advance so I don't understand why we have to add it back to net income. Because on question 11 it says "increase in prepaid expense" so isn't that the same thing as "decrease in prepaid insurance"?

RetL 10 Net income Depreciation expense Increase in accounts receivable Decrease in inventory Decrease in prepaid insurance Decrease in salaries payable Increase in interest payable $24,300 8,500 4,700 6,200 1,550 3,400 950 20 points Required: Prepare a reconciliation of net income to net cash flows from operating activities. (Amounts to be deducted should be in minus sign. Enter your answers in thousands.) Answer is complete and correct. >$ 24,300 8,500 Cash flows from operating activities: Net income Adjustments for noncash effects: Depreciation expense Changes in operating assets and liabilities: Increase in accounts receivable Decrease in inventory Decrease in prepaid insurance Decrease in salaries payable Increase in interest payable (4,700) 6,200 1,550 (3,400) 950
11 Lemplex Corporation prepares ILS SLALEMENLUI CASITIOS using live IulieCLIELIVU liepunt opei diny a 2021 fiscal year was $684,000. Depreciation and amortization expense of $99,000 was included with oper statement. The following information describes the changes in current assets and liabilities other than cash: 20 points Decrease in accounts receivable Increase in inventory Increase in prepaid expenses Increase in salaries payable Decrease in income taxes payable $34,000 10,400 9,700 11, 200 10,000 Required: Prepare the operating activities section of the 2021 statement of cash flows. (Amounts to be deducted sho minus sign.) Answer is complete and correct. >$ 684,000 99,000 Ca from operating activities: Net income Adjustments for noncash effects: Depreciation and amortization expense Changes in operating assets and liabilities: Decrease in accounts receivable Increase in inventory Increase in prepaid expenses Increase in salaries payable Decrease in income taxes payable 34,000 ? (10,400) (9,700) 11,200 (10,000) ?

Expert Solution

I will give you a simple logic, which if you use while preparing cashflow statements, you'll never face any difficulties.

An increase in asset means that the company has spent cash to purchase asset, therefore, it is an outflow of cash. Decrease in asset means company has sold the asset and received cash for that, which will be an inflow of cash.

Same is the case with liabilities, when liability increases, take it as borrowing of cash by the company, therefore it's an inflow of cash. When liability decreases, it means company has paid off its liability with cash, it'll result in outflow of cash.

Now, since prepaid insurance is an asset, increase it the same means company has paid cash to acquire it, therefore it'll result in outflow of cash and we need to deduct it. If prepaid insurance decreases, it can be taken as asset sold for cash, resulting in inflow of cash and the same must be added.

If you need any further assistance regarding this, please comment. Thank you

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