Prepaid insurance appears on which financial statement?

• A. Balance Sheet
• B. Income Statement
• C. Cash Flow Statement
• D. Statement of Changes in Equity

Answer: (A)

Prepaid insurance is a prepaid asset—money paid for insurance coverage you’ll receive in the future. Because it represents a future economic benefit, it sits on the Balance Sheet as a current asset. It isn’t shown on the Income Statement as an expense until the coverage period passes and the asset is consumed, at which point it becomes Insurance Expense and the asset is reduced. On the Cash Flow Statement, you’d see the initial payment as a cash outflow, and later changes in the prepaid amount flow through operating activities as part of working capital adjustments, but the item itself is reported on the Balance Sheet.