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 income.

Question

Quizplus · Accepted Answer

A decrease in prepaid expenses means that the company has used up the prepaid amount, which is usually recorded as an asset on the balance sheet. This decrease in prepaid expenses should be added back to net income when using the indirect method to calculate net cash provided by operating activities. Adding back the decrease in prepaid expenses will adjust net income to reflect the actual amount of cash received or paid during the period for these expenses.

Using the Indirect Method to Calculate Net Cash Provided by Operating