If the balance in prepaid expenses increased during the year, what action should be taken on the statement of cash flows when following the indirect method, and why?
a. The change in the account balance should be subtracted from net income because the net increase in prepaid expenses did not impact net income but did reduce the cash balance.
b. The change in the account balance should be added to net income because the net increase in prepaid expenses did not impact net income but did increase the cash balance.
c. The net change in prepaid expenses should be subtracted from net income to reverse the income statement effect that had no impact on cash.
d. The net change in prepaid expenses should be added to net income to reverse the income statement effect that had no impact on cash.
Answer: A
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