A company's prepaid expenses are $15,000 at the beginning of the year and $8,000 at the end of the year. What adjustment to net income should be made if the indirect method is used?

Question

Business

Kimberly Conrad

26 February, 06:05

A company's prepaid expenses are $15,000 at the beginning of the year and $8,000 at the end of the year. What adjustment to net income should be made if the indirect method is used?

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Answers (1)

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Isabela Ashley · Answer 1

The $7,000 balance of prepaid expenses should be added in the net income.

Explanation:

If the indirect method of cash flow statement is followed, then the decrease in current assets would increase the cash balance as it is an inflow of cash whereas the increase in current assets would decrease the cash balance as it is an outflow of cash.

But in the current liabilities, the conditions are opposite which means a decrease in current liabilities would decrease the cash balance whereas the increase in current liabilities would increase the cash balance.

In the question, it is given that the opening balance of the prepaid expenses is $15,000 and the ending balance is $8,000 which show decrements of $7,000 which will add to the net income.

Hence, the $7,000 balance of prepaid expenses should be added in the net income.