Question

The company prepaid $3,000 cash for insurance on December 20, 2019 for insurance coverage January, February and March 2020. Record the transaction that would be recorded in December.

1. How would this impact net income? state increase or decrease and amount or NA (example: increase 10,000)

2. How would this impact the cash (bank) account? state increase or decrease and amount or NA  (example: decrease 10,000)

3. What type of cash flow activity would it be on the cash flow statement? put OA, IA, FA, or NA  (example: OA)

• OA= operating activity
• IA= investing activity
• FA=financing activity
• NA= not applicable

Answer 1

Solution:

The entry would be:

Prepaid Insurance	$ 3,000
To Bank		$ 3,000

Answer 1: NA

Explanation:

Prepaid Insurance increases the asset (prepaid Insurance) and does not impact incomes or expenses.

$ 3,000 will be treated as an expense in the month in which they are approved, i.e. next three months. So, no impact on Net Income for December.

Answer 2: Decrease $ 3,000

Explanation:

Payment of Prepaid Insurance will decrease cash by $ 3,000 as there is a payment made of $ 3,000 through bank or cash.

Answer 3: OA= operating activity

Explanation:

Operating activities are those activities that are related to day to day operations of the business.

In other words, operating activities are the functions of the business that are directly related to the production of goods or rendering of services. These are the core and main business activities.

Example: Insurance paid, receipt of customers, payments to suppliers, taxes paid, salaries paid, etc.

Hence, this will be an operating activity in Cash Flow Statement.

In case of any doubt, please feel free to comment.