Question & Answer: Total operating expenses on Ocean Company's income statement for last year totaled $400,000. During the year, accrued liabilities inc…..

Total operating expenses on Ocean Company’s income statement for last year totaled $400,000. During the year, accrued liabilities increased by $23,000 and prepaid expenses increased by $16,000. Depreciation expense for the year was $30,000. Based on this information, operating expenses adjusted to a cash basis under the direct method on the statement of cash flows would be:

a.$518,000.

b.$363,000.

c.$272,000.

d.$300,000.

Expert Answer

 

cash expenses = operating expenses (income statement) – increase in accrued liabilities + increase in prepaid expenses – depreciation expense

= $400,000 – $23,000 + $16,000 – $30,000

= $363,000

accrued liabilites are recorded but not paid, hence subtracted

prepaid expenses are paid but not recorded, hence added

depreciation is a non-cash item hence subtracted

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