Prepaid_Expenses: Accounting
I understand that if a company (Let's call it Rover) pays 3 months of rent for an office space in advance, it's called a prepaid expense. In this case, the income statement doesn't change since Rover hasn't started using the office space yet (it's not expensed until Rover starts using the rental space in month 1, 2, 3). However, the cash flow changes since Rover paid in advance. Thus, we make cash adjustments to reflect this. If the net income (assuming nothing else changed) was 100 and Rover paid 60 in cash for the office space, the net cash is now 100 - 60 = 40.
Thus, I understand that prepaid expense increased, so we adjust the cash down to reflect how much cash Rover actually generated in this period.
Question: If prepaid expenses decrease as Rover starts using the office space in month 1, why would cash increase? We paid 60 upfront and we are not getting the cash back, why would we increase the net change in cash?
Net Income: 100
change in Prepaid Exp: 20
Net change in cash: 120
More specifically, I am referring to a cash increase in the cash flow statement
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