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
Regards