Special Purpose Framework

Question 1

Young & Jamison’s modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?

Answer 1

$165,000

In converting cash paid for operating expenses from the modified cash-basis to accrual-basis adjust­ments must be made for the changes in prepaid expenses and accrued liabilities from the beginning of the year to the end of the year. An increase in prepaid expenses would require a minus $5,000 (the difference between $15,000 and $10,000) adjustment to derive the accrual basis. An increase in accrued liabilities would require a plus $20,000 (the difference between $25,000 and $5,000) adjustment to derive the accrual basis. [$150,000 – $5,000 + $20,000 = $165,000