Question

Rory Co.'s prepaid insurance was $50,000 at December 31, 20X5 and $25,000 at December 31, 20X4. Insurance expense was $20,000 for 20X5 and $15,000 for 20X4.

What amount of cash disbursements for insurance should be reported in Rory's 20X5 net cash flows from operating activities presented on a direct basis?

The answer is $45,000.

*how to get $45,000?

**how are insurance payment and insurance expense different? It's asking cash disbursements...is it the same as insurance payment or expense?

Please help,

thank you in advance.

Answer 1

Amount of cash disbursements for insurance should be reported in Rory's 20X5 net cash flows from operating activities presented on a direct basis

	Amount
Ending Prepaid Insurance at Dec 31,20X5	$50,000
Plus: Insurance Expense for 20X5	$20,000
	$70,000
Less: Beginning Prepaid Insurance at Dec 31, 20X4	($25,000)
Cash Paid for Insurance during 20X5	$45,000

Part 2 -  how are insurance payment and insurance expense different? It's asking cash disbursements...is it the same as insurance payment or expense

No. Insurance Expenses are the expenses expired during the year 20X5.

Normally, the insurance expenses are paid in advance for one year or two year. At the time of payment it is recorded as Prepaid Insurance since the expenses are not expired. At the end of accounting period, this prepaid insurance adjusted by the expired period and expenses are recorded.