Question

Crabbe Company reported $80,000 of selling and administrative expenses on its income statement for the past year. The company had depreciation expense and an increase in prepaid expenses associated with the selling and administrative expenses for the year. Assuming use of the direct method, how would these items be handled in converting the accrual based selling and administrative expenses to the cash basis

Answer 1

Answer: Deducted from Depreciation; Added to expenses

Step-by-step explanation:

First and foremost, it should be noted that depreciation is regarded as a non cash expense, which implies that it will have to be subtracted from the selling and the administrative expenses in order to get the cash base.

Also, the increase in prepaid expenses won't reflect in the income statement, and should be added to the selling and administrative expenses in order to arrive at the cash base.