if a firm has prepaid the insurance premium of $1200 in May for the whole...
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if a firm has prepaid the insurance premium of $1200 in May for the whole upcoming year, then in June of the same month the CASH FLOW statement should have ...
1. Operating cash increased (+ $200) 2. Operating cash decreased (- $200) 3. Operating cash increased by X (+ $X) .. How much X ? 4. Operating cash decreased by Y (- $Y) ... How much Y ? 5. No effect at all
My Answer -
I think because Prepaid Insurance is current asset it is affecting cash flow by reducing it. But as month expires the asset starts reducing its value and actual operating expense starts flowing out on monthly installment basis (liquidates) ...
So it can be operating outflow accruing for both months of May and June i.e. $100*2 = $200.
Which means option 2.
Is this answer and understanding correct? If not please explain?
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