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