An increase in an asset account must be subtracted from net income because it represents cash paid out that is not on the income statement. Therefore, the increase in prepaid expenses will be a deduction from net income to reconcile net income to cash flow from operating activities.
Only the direct method of preparing the Statement of Cash Flows requires a reconciliation between net income and net cash flows from operating activities. This reconciliation is exactly the same as the net cash flows from operating activities as it is presented under the indirect method. Under both the indirect method and in the reconciliation required under the direct method, an increase in an asset account must be subtracted from net income because it represents cash paid out that is not on the income statement. Therefore, the increase in prepaid expenses will be a deduction from net income to reconcile net income to cash flow from operating activities. The amortization of premium on bonds payable reduces interest expense and thus it increases net income without increasing cash. Therefore, it will also need to be deducted from net income in the reconciliation.
The amortization of premium on bonds payable reduces interest expense and thus it increases net income without increasing cash. Therefore, it will need to be deducted from net income in the reconciliation.
An increase in an asset account must be subtracted from net income because it represents cash paid out that is not on the income statement. Therefore, the increase in prepaid expenses will be a deduction from net income to reconcile net income to cash flow from operating activities. The amortization of premium on bonds payable reduces interest expense and thus it increases net income without increasing cash. Therefore, it will also need to be deducted from net income in the reconciliation.
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