When the indirect method is used,if prepaid expenses decreases during the accounting period,the change in prepaid expenses is:
A)added to the change in the cash account.
B)subtracted from net income.
C)added to net income.
D)subtracted from the change in the cash account.

Question

Quizplus · Accepted Answer

When using the indirect method for cash flow statement preparation, a decrease in prepaid expenses indicates that more cash was used than was initially recorded as an expense. Therefore, to adjust net income to the cash basis, the decrease in prepaid expenses is added to net income. This adjustment is necessary because the cash flow statement aims to reflect actual cash movements, and the decrease in prepaid expenses represents an outflow of cash not captured in the net income calculation.

When the Indirect Method Is Used,if Prepaid Expenses Decreases During