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How do changes in prepaid expenses impact cash flow?

When the prepaid expense balance increases, that means the company has a cash outflow for expenses that have not yet been recognized in the income statement. For example, if the company prepays rent for 12 months, the prepaid rent balance will increase for the 12 months of rent prepaid. However, on the expense side, the 12 months of expenses will not be recognized until the end of the year. Overall, an increase in prepaid expenses results in a cash outflow while a decrease results in a cash inflow.


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