How does decrease in prepaid expense increse the cash flow? Please explain. Give suitable examples as well.

Dear Student

The decrease in Prepaid Expenses means, from prepaid Expense Account we have charged Expense for the current year by passing the journal entry :
Journal in the books
Date Particulars    Debit   Credit 
  Expense A/c Dr.  xxx   
    To Prepaid Expense      xxx 
  (Being Expense of Current year booked which was paid in previous year)      

Now at the year-end, this expense would be charged to Profit and Loss account, which would result in the decrease of Profit to the extent of this expense.
But see, for this expense, there was no outflow of Cash in the current year. So it means Net profit contain one expense which was not because of Cash outflow, therefore, we need to add this expense to arrive at the actual cash profit from operations, and hence it is added.

For E.g
Net Profit for current year                           1,000,000
Opening Prepaid Expense Balance                              100,000
Closing Balance                                 50,000
Expense of Current year booked from Prepaid Expense Debited in Profit and Loss Account                                 50,000

Here Expense of Rs 50,000/- debited in profit and loss account wasn't actually paid in cash and as a result Net profit or Cash profit is Understated by Rs 50,000/-
Therefore to arrive at cash generated from operations we have to add this 50,000 in Net profit. This is the phenomenon of Prepaid expense in Cash flow statement.

Hope this helps

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Decrease in prepaid expenses that we had not given any extra amount in this accounting period as compared to previous which means there is less outflow hence increases the inflow.   Example:  Insurance premium paid in advance  2000 previous year, but this year it was 1000 it means there is increase of 1000 this year.
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