CFA Practice Question

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CFA Practice Question

The beginning balance of the prepaid insurance account was $3,200. The ending balance of the account was $5,000. Insurance expense recognized for the period was $4,000. The cash outflow from the purchase of insurance policies was ______.
Correct Answer: $5,800

Cash payments for insurance expense equals: insurance expense + increase in prepaid insurance or - decrease in prepaid insurance. $4,000 + $1,800 = $5,800 Proof: $3,200 + $5,800 - $4,000 = $5,000, the ending balance.

User Contributed Comments 11

User Comment
bokica net change in insurance $1.800. Since insurance expensec were $4.000 the cash outflow for purchase must be $4.000 + (add net chage) $1.800 which equals $5.800???
tanyak I think the cash outflow from the purchase of insurance was $1800...does anyone else agree?

o123 ya tanya...the way i see it...prepaid insurance increased by 1800 over the year, which could only mean that they spent cash to buy it.
mordja o123, yes but prepaid has increased (cash outflow of $1800). Insurance expense recognised was $4,000. Given that the prepaid increased (not decreased) we know that the $4,000 was also paid for in the period. Thus total cash outflow equals the expense recognised plus the increase in the prepayment. = $5,800
3dmouse Ending = Begining + Purchases - Expense
5000 = 3200 + Purchase - 4000
5000 - 3200 + 4000 = Purchase = 5800
Murrayman The beginning balance of the prepaid account is $3,200. This means that it was a cash outflow in a prior period, does it not? If it is the case, then we only concern ourselves with the $1,800 paid in cash during the reporting (current) period.
johntan1979 Argh, I got confused with payable. Prepaid insurance means PAID... cash outflow. Increase in prepaid insurance balance means increase in cash outflow by the amount of (End bal - Beg bal) and add that to Insurance Expense to get total cash outflow.
2014 The prepaid Insurance amount for the end of the year changes as the way your mobile prepaid balance changes. the change in mobile prepaid balance at the end of year is 180 from begining. This does not mean that you had just 1800 outflow. U used 4000 already which is refleacted as expense. Income statement rule Expenses are matched to revenue to the period. This means that 4000 (used) + 1800 (additional new) I hope this helps
microeconomist The asset was worth $3,200; the asset is now worth $5,000. $1,800 was spent to improve the asset. Also, $4,000 was spent to use the asset during the period. Total outflow was $5,800.
farhan92 im not trying to brag but i done this without using a calculator ;)
UcheSam Farhan92 your point? That’s just arithmetic. The point is knowing the concept. Blowing the trumpet of what you are overtly covering.
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