Assume That the Indirect Method Is Used to Determine Net

question 83

Multiple Choice

Assume that the indirect method is used to determine net cash provided by (used in) operating activities and that Prepaid Insurance decreased during the year. That decrease is added to net income because:

• A) the company paid additional premiums this period in excess of the Insurance Expense recorded on the income statement.
• B) a decrease in Prepaid Insurance causes an increase in Insurance Expense and a decrease in net income, but it does not involve cash so it is added back to net income.
• C) it includes the impact of increasing cash and increasing net income.
• D) it accounts for purchasing more insurance during the period than has been expenseD.
• The income statement reports expenses of the period, but cash flow from operating activities must reflect the cash payments. Cash prepayments increase the balance in prepaid expenses, and recording of expenses decreases the balance in prepaid expenses. A decrease in Prepaid Expenses means that cash prepayments this period were less than expenses. These extra cash prepayments must be added to net income.

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Definitions:

Insurance Contract

A legally binding agreement between an insurance company and the policyholder, specifying the terms for the payment of insurance benefits.

Insuring Property

The act of purchasing insurance to protect against loss or damage to property due to hazards like fire, flood, or theft.

Transferring Risk

Transferring risk involves moving potential financial loss from one party to another, commonly through insurance policies or hedging strategies.

Allocating Risk

The process of identifying and distributing the potential financial, operational, or legal hazards among parties in a transaction or agreement.