During the year the balance in the Prepaid Expenses account increased by $6,000. In order to adjust the company's net income to a cash basis using the direct method on the statement of cash flows, it would be necessary to:
A) subtract the $6,000 from the selling and administrative expenses reported on the income statement.
B) add the $6,000 to the selling and administrative expenses reported on the income statement.
C) subtract the $6,000 from the cost of goods sold reported on the income statement.
D) add the $6,000 to the cost of goods sold reported on the income statement.

Question

Quizplus · Accepted Answer

When the balance in the Prepaid Expenses account increases, it means the company has paid more in expenses than it has expensed on the income statement. To adjust net income to a cash basis using the direct method, you add the increase in Prepaid Expenses to the expenses reported on the income statement, as this represents cash outflow not yet expensed.

During the Year the Balance in the Prepaid Expenses Account