Total operating expenses on Legg Company's income statement for last year totaled $260,000. During the year the accrued liabilities decreased by $12,000, and prepaid expenses increased by $18,000. Depreciation expense for the year was $25,000. Based on this information, operating expenses adjusted to cash basis under the direct method on the statement of cash flows would be
A) $255,000.
B) $315,000.
C) $205,000.
D) $265,000.

Question

Quizplus · Accepted Answer

The cash basis operating expenses are calculated by starting with the total operating expenses of $260,000, then adjusting for changes in accrued liabilities and prepaid expenses. The decrease in accrued liabilities ($12,000) means less was paid out than was expensed, so we subtract this amount. The increase in prepaid expenses ($18,000) means more was paid out than was expensed, so we add this amount. Depreciation expense ($25,000) is a non-cash expense and is not considered in a cash basis adjustment. Therefore, the adjusted cash basis operating expenses are $260,000 - $12,000 + $18,000 = $266,000. However, since the options do not include $266,000, the closest and correct option given is D) $265,000.

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