Question

Operating expenses other than depreciation for the year were $300,000. Accrued expenses decreased by $30,000 during the year. Cash payments for operating expenses to be reported on the cash flow statement using the direct method would be

Answer 1

Answer: $330,000

Step-by-step explanation:

Using the Direct Cashflow statement the expenses minus the Depreciation is added to a reduction in the Accrued Expenses to give the amount paid.

Therefore,

= 300,000 + 30,000

= $330,000

The rationale behind this is that Operating Expenses are paid for by cash and so reduce the cash balance. Depreciation on the other hand, even though it is recognised as an expense, it is not a cash expense because the company doesn't give cash to the equipment being depreciated, the depreciation is just recorded and it does not reduce the cash balance. Operating Expenses like electricity reduce the cash balance because they are paid for.

Accrued Expenses are a liability and when a liability decreases that means that the company has used some cash to pay it off. This is a cash payment which falls under Operating Expenses because they were expenses owed and now they have been paid for.