Under the direct method of determining the net cash provided by (used in) operating activities on the statement of cash flows, one step in adjusting selling and administrative expenses from an accrual to a cash basis is to subtract any increase in prepaid expenses.

Question

Quizplus · Accepted Answer

Under the direct method, adjusting selling and administrative expenses from an accrual to a cash basis involves adding back any increase in prepaid expenses, not subtracting it, because the increase in prepaid expenses represents cash paid out that did not affect the current period's income statement.

Under the Direct Method of Determining the Net Cash Provided