A is corrent. When using the direct approach to determine cash flows from operating activities, the cash paid for insurance equals the accrual-basis insurance expense plus/minus any increase/decrease in the prepaid insurance account. The solutions approach is to prepare a T-account for prepaid insurance. In the T-account below, you must solve for the missing debit to determine that $45,000 was paid for insurance in year 2. Note that insurance expense in year 2 is included as a credit to prepaid insurance; however, year 1 insurance expense is irrelevant and therefore not included in the T-account.
B is incorrect. When using the direct approach to determine cash flows from operating activities, the cash paid for insurance equals the accrual-basis insurance expense plus/minus any increase/decrease in the prepaid insurance account. The solutions approach is to prepare a T-account for prepaid insurance. In the T-account below, you must solve for the missing debit to determine that $45,000 was paid for insurance in year 2. Note that insurance expense in year 2 is included as a credit to prepaid insurance; however, year 1 insurance expense is irrelevant and therefore not included in the T-account.
C is incorrect. When using the direct approach to determine cash flows from operating activities, the cash paid for insurance equals the accrual-basis insurance expense plus/minus any increase/decrease in the prepaid insurance account. The solutions approach is to prepare a T-account for prepaid insurance. In the T-account below, you must solve for the missing debit to determine that $45,000 was paid for insurance in year 2. Note that insurance expense in year 2 is included as a credit to prepaid insurance; however, year 1 insurance expense is irrelevant and therefore not included in the T-account.
D is incorrect. When using the direct approach to determine cash flows from operating activities, the cash paid for insurance equals the accrual-basis insurance expense plus/minus any increase/decrease in the prepaid insurance account. The solutions approach is to prepare a T-account for prepaid insurance. In the T-account below, you must solve for the missing debit to determine that $45,000 was paid for insurance in year 2. Note that insurance expense in year 2 is included as a credit to prepaid insurance; however, year 1 insurance expense is irrelevant and therefore not included in the T-account.
