Question

State whether the following will increase, decrease or have no effect on cash flow from operating activities while preparing 'Cash Flow Statement':

1) A decrease in outstanding employees benefits expenses by Rs 3,000

2) Increase in prepaid insurance by Rs 2,000

Answer 1

1) In case there is a decrease in current liability of employee benefit expenses being due, it would be treated as an item of working capital changes. Accordingly, a decrease in current liability would be treated as an outflow of cash from operating activities.

2) Increase in Prepaid Insurance is treated as an increase in current assets which is treated as a decrease in cash flow (or outflow) from operating activities.