 In this presentation, we will continue with the statement of cash flows in direct method looking at the change in prepaid expenses. We're going to be using this information. We've got the comparative balance sheet. We've got the income statement and some additional information. We will be working primarily with the difference in the comparative balance sheet with the use of a worksheet. Taking this information support accounting instruction by clicking the link below giving you a free mug membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it to create this worksheet. So this is just basically a comparative balance sheet that has been condensed down to something that looks like a post closing trial balance. We are constructing our cash flows from operations from it. We have all of our differences. We're basically just finding a home for these differences. We know if we do so that if we find a home for all of these differences then it'll add up to that difference the difference in cash which is basically the bottom line of our cash flow statement or that's what we want to get to in terms of adding up the cash flows. So we've gotten so far we're working on the cash flows from operations and we've done the cash flows in terms of the accounts receivable inventory now we're on prepaid expenses we're just going through these now if you have the cash flow and you're actually working through the cash flow by this time it comes it becomes kind of easier saying going well that's another prepaid expense it's in the prepaid expenses the current asset just like accounts receivable and inventory it's going to follow the same principle so I would just think of this principle as we've gotten to it with accounts receivable and apply that here so we'll have the same concept if you're given this in a book problem however we may not have this principle here you might have a test question asking about prepaid expense and to do that if we don't know if it's if it's an increase or decrease or which way it should go in the cash flow statement it may be easier to actually think about accounts receivable and then apply that same principle so that's how I would think about it I would think well this is a current this is a a current asset if I haven't memorized that current assets when they increase will decrease the cash flow and when they decrease they'll increase the cash flow then I can think through the logic of that related to accounts receivable because that's probably the easiest one to think through because it's the most clear set of two types of journal entries that go through that account and apply that same principle to all others so I won't go through the full thing again for accounts receivable but you can see the prior presentations to see the logic of accounts receivable and then apply that same logic here we can see that what happened here from 2004 to 2005 2004 to 2005 we had 17,000 in the prepaid expenses going down to 15,100 so it decreased here on the difference we're increasing it on the cash flow statement so so again we're just going to apply the reasoning here by saying hey that's what we did with accounts receivable and we are we're going to show it here just with this abbreviated type of formatting notice in the in a final draft of a cash flow statement we should say increase or decrease and not have brackets around it but when we look at a worksheet like this we can put these in here and this is a less formal kind of way to say it because it covers all of our bases no matter what happens over here we're covered with an increase and a decrease and it tells us whether an increase or decrease in the activity over here what will be the effect on the cash flow statement so it's really useful to to format when you're working on something in this format once you've done so a few times then you'll have this in terms of a cheat sheet so we're going to say well if it increases and it's a current asset then we're going to decrease it over here if there's a decrease it's non-bracketed over here then we're going to increase it over here the reverse will be the case when we get to liabilities