A company reported an increase in prepaid rent and an increase in accrued liabilities during 2016. 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 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. This is because prepaid rent is a cash outflow, so it needs to be added back to operating expenses to reflect the actual cash paid. On the other hand, accrued liabilities are expenses that have been incurred but not yet paid in cash, so they need to be subtracted from operating expenses to reflect the actual cash paid.

A Company Reported an Increase in Prepaid Rent and an Increase