Question

Under the direct method, which of the following items must be added to operating expenses reported on the income statement to determine cash payments for operating expenses?

• A. Increase in accrued expenses
• B. Decrease in prepaid expenses
• C. Increase in income taxes payable
• D. Increases in prepaid expenses

Answer 1

The correct option is D Increases in prepaid expenses

Under direct method of statement of cash flow, major heads of cash inflows and outflows are considered. Certain items are recorded on accrual basis in profit and loss account.

Hence, certain adjustments are made to convert them into cash basis such as cash receipt from customers, cash payments to supplies, purchases, prepaid expenses etc.