Using the indirect method to calculate net cash provided by operating activities,a decrease in prepaid expenses is:
A)subtracted from net income.
B)added to net income.
C)ignored since it does not affect expenses.
D)ignored since it does not affect net income.

Question

Quizplus · Accepted Answer

A decrease in prepaid expenses means that less cash was spent on prepayments, which should be added to net income under the indirect method. This is because under accrual accounting, the prepaid expense was originally recorded as an increase in expenses, but it did not involve an outflow of cash at that time. Therefore, when the prepaid expense later decreases, it represents a source of cash, which should be added to net income to arrive at net cash provided by operating activities.

Using the Indirect Method to Calculate Net Cash Provided by Operating