Qtopia Company uses the direct method to prepare its cash flow statement.It has reported operating expenses of $21 000 on its income statement for the year 2016.If the balance in accrued liabilities has gone up by $1 000 during the year,then $1 000 will have to be added to $21 000 as part of the process to calculate payments to suppliers for operating expenses.

Question

Quizplus · Accepted Answer

The increase in accrued liabilities indicates that the company has incurred expenses for which it has not yet paid. Therefore, the $1,000 increase in accrued liabilities should be subtracted from the operating expenses reported on the income statement to calculate the actual cash paid to suppliers for operating expenses. Therefore, the actual cash paid to suppliers for operating expenses is $20,000 ($21,000 operating expenses - $1,000 increase in accrued liabilities). This is the amount that should be reported on the cash flow statement.

Qtopia Company Uses the Direct Method to Prepare Its Cash