A company reported an increase in prepaid rent and an increase in accrued liabilities during 2014. Which of the following statements is correct?
A) When determining cash paid for operating expenses, both the increase in prepaid rent and the increase in accrued liabilities are subtracted from operating expenses.
B) When determining cash paid for operating expenses, both the increase in prepaid rent and the increase in accrued liabilities are added to operating expenses.
C)When determining cash paid for operating expenses, the increase in prepaid rent is added to operating expenses and the increase in accrued liabilities is subtracted from operating expenses.
D)When determining cash paid for operating expenses, the increase in prepaid rent is subtracted from operating expenses and the increase in accrued liabilities is added to operating expenses.

Question

Quizplus · Accepted Answer

When prepaid rent increases, it means that the company paid in advance for rent expenses that will be recognized as an expense in future periods. Therefore, the increase in prepaid rent should be subtracted from operating expenses to determine cash paid for operating expenses.
On the other hand, when accrued liabilities increase, it means that the company incurred expenses but had not yet paid for them. Therefore, the increase in accrued liabilities should be subtracted from operating expenses to determine cash paid for operating expenses.
Therefore, the increase in prepaid rent is added to operating expenses, and the increase in accrued liabilities is subtracted from operating expenses. Hence, choice C is correct.

A Company Reported an Increase in Prepaid Rent and an Increase