How to solve for cash outflows for prepaid insurance?
Pretty much every company has some form of insurance, right? By simply looking at the income statement, it may not be easy to figure out what the cash outflow for insurance was in specific period. Just like any balance sheet account, we can prepare a balance sheet rollforward.
We always start with the beginning balance (prior year ending balance), add the item that would increase the balance sheet account, and then subtract the expense recognized in the period. What you’re left with is the ending balance for that specific balance sheet account.
Setting up the prepaid insurance rollfoward
So for prepaid insurance, if we make a cash payment to a vendor, then that would increase our prepaid insurance account. Prepaid insurance only decreases when we recognize the expense in the income statement.
So we would always start with beginning prepaid insurance, add cash paid to insurance providers throughout the year, subtract insurance expense recognized, and then that would total to the ending prepaid insurance balance.
Example on how to solve for cash paid to insurance vendors
For example, if the question tells us that the beginning balance is $25,000, the ending balance is $50,000, and insurance expense during the year was $20,000, then here is how we would setup the prepaid insurance rollforward:
To solve, all you need do is figure out what number balances the rollforward. There are a number of ways you could solve for this simple formula, but the most important thing is to check your math. As you can see below, the answer is $45,000.
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