Respuesta :
When using indirect method, adding a decrease in the prepaid insurance to the net income eliminates effect of the recording insurance expense that has not been paid in cash.
What is indirect method?
By starting with net income and then adjusting it for cash operational activities before reaching an ending cash balance, the indirect method is a technique used in financial reporting. In order to create the statement of cash flows for an accounting period, the indirect technique requires accrual accounting data. Regulatory organizations do not favor the indirect way of financial reporting since it does not clearly depict cash flows for a given time, despite the fact that most accountants prefer utilizing it. Many accountants report cash flow of a certain business in the indirect method manner. In order to determine the actual amount of money generated by business operations, this method modifies net income.
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