[Boate]

Hi All,

Below is a question from Becker SoCF section and I’m confused as to why the Prepaid Rent Expense is Added back…..

Lino Co.’s worksheet for the preparation of its Year 2 statement of cash flows included the following:

December 31 January 1

Accounts receivable $ 29,000 $ 23,000

Allowance for uncollectible accounts 1,000 800

Prepaid rent expense 8,200 12,400

Accounts payable 22,400 19,400

Lino’s Year 2 net income is $150,000. What amount should Lino include as net cash provided by operating activities in the statement of cash flows?

a. $145,400

b. $148,600

c. $151,000

d. $151,400

Explanation

Choice “d” is correct. $151,400 net cash provided by operating activities, as follows:

Net income $ 150,000

Increase in A/R (6,000)

Increase in allowance 200

Decrease in prepaid 4,200

Increase in A/P 3,000

$ 151,400

Can someone explain to me why the decrease in Prepaid Rent is Added back when in the Becker Book on Page F7-35, it states that if there is a Decrease in Prepaid Expenses, it is Subtracted from NI. Did anyone else notice this. If you do in fact add this into NI can someone explain to me why? I look at it as that I paid the cash in a prior period so I do not have the cash any longer so why would the cash be added back?

AUD: (65)(66) 77
REG: (66) (48) destroyed me mentally.....
FAR: (68) (66)(69)(71)
BEC: (63) 75

"Greatness is not some precious thing, it is no more unique to us than breathing. We are ALL capable of it."

[JohnWayneIsGod]

Not sure about Becker, but an decrease in pre-paid rent does get added back in when reconciling Net Income to find Cash Flow from Operating Activities. The reason is that a decrease in pre-paid rent creates an expense that is in the income statement, but the cash was already spent when the prepaid was created so we need to add the cash back when when preparing the Cash Flow Statement.

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Missy]

Net income includes the effects of non cash items. To go from net income to cash flow you have to eliminate the effects of non cash items.

You net income includes rent expense that was not paid by cash in the current period because it had been paid in a prior period. So $4200 of rent expense gets added back to net income since it did not involve an outflow of cash in the current period.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Boate]

thank you for the replies! much appreciated

AUD: (65)(66) 77
REG: (66) (48) destroyed me mentally.....
FAR: (68) (66)(69)(71)
BEC: (63) 75

"Greatness is not some precious thing, it is no more unique to us than breathing. We are ALL capable of it."

[Author]

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