Question

When preparing a statement of cash flows, a decrease in prepaid insurance during a period would require which of the following adjustments in determining cash flows from operating activities?

Indirect Method Direct Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease

Answer 1

a. Increase Decrease

Step-by-step explanation:

When you are preparing a cash flow statement using the indirect method, a decrease in prepaid insurance account will increase the cash flow, similarly to a decrease in inventory or accounts believable.

On the other hand, if you are preparing a cash flow statement using the direct method, a decrease in prepaid insurance would decrease the cash flow.