Your Ask Joey ™ Answer

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.


Back To All Questions

You might also be interested in...

  • 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. An example that you might see on the CPA exam might indicate that 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. We feel that it’s important to see this with a visual in order to better understand the intuition. Check out our breakout below: What Does an Increase Mean? An increase in prepaid expenses indicates that more cash is being spent today for future expenses incurred. This will lead to a decrease in net cash flows. What Does a Decrease Mean? A decrease in prepaid expenses indicates that less cash is being spent today for expenses incurred, which will lead to an increase in net cash flows.

  • What is the journal entry to record a prepaid expense?

    Learn More First, you need to understand how prepaid expenses work. In the example below, the company made a $90 prepayment to the landlord for rent. When the $90 prepayment is made, that would be a debit to prepaid expense and a credit to cash. Then at the end of each month, the company must recognize rent expense, which would be 1/3rd of the total prepayment since the prepayment was for 3 months. Therefore, the company would debit rent expense and credit prepaid rent over the next 3 months. At the end of month 3, the company would have a prepaid balance of $0 and rent expense for the last 3 months totals $90 combined. Learn More

  • What is the journal entry to record prepaid rent?

    Journal entry for prepaid rent image