When a Statement of Cash Flows is prepared using the indirect method, a decrease in the balance of a prepaid expense during the reporting period is an "add back" adjustment to net income to convert it to cash from operating activities.

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A decrease in the balance of a prepaid expense indicates cash has been used to pay for the prepaid expense in advance. In the Statement of Cash Flows using the indirect method, this decrease is added back to net income to adjust for non-cash expenses and convert net income to cash from operating activities.

When a Statement of Cash Flows Is Prepared Using the Indirect