Total operating expenses on Harmon Company's income statement for last year totaled $370,000. During the year accrued liabilities increased by $18,000, and prepaid expenses increased by $25,000. Depreciation expense for the year was $45,000. Based on this information, operating expenses adjusted to cash basis under the direct method on the statement of cash flows would be

Question

Quizplus · Accepted Answer

To adjust the operating expenses to a cash basis using the direct method, we need to adjust for changes in accrued liabilities and prepaid expenses.

Adjusted operating expenses = Total operating expenses + Increase in accrued liabilities - Increase in prepaid expenses 
Adjusted operating expenses = $370,000 + $18,000 - $25,000 = $363,000

We also need to add back the depreciation expense since it's a non-cash expense:

Adjusted operating expenses = $363,000 + $45,000 = $408,000

Therefore, the correct answer is B) $332,000.

Total Operating Expenses on Harmon Company's Income Statement for Last