Question

Expenses paid in advance at the end of the year are ______ the profit made during the year.

Options

• added to

• deducted from

Answer 1

Expenses paid in advance at the end of the year are deducted from the profit made during the year.

Explanation:

According to the indirect method of a Cash Flow Statement, expenses paid in advance at the end of the year are deducted from the net profit. Prepaid expenses are current assets, and an increase in them shows that cash was paid out this year for a future benefit. Since this cash outflow happened but was not recorded as an expense in the Profit and Loss statement, the net profit looks higher than the actual cash. Subtracting it fixes this to show the true cash from operating activities.