During the year the balance in the Prepaid Expenses account increased by $6,000.In order to adjust the company's net income to a cash basis using the direct method on the statement of cash flows, it would be necessary to:

A) subtract the $6,000 from the selling and administrative expenses reported on the income statement.
B) add the $6,000 to the selling and administrative expenses reported on the income statement.
C) subtract the $6,000 from the cost of goods sold reported on the income statement.
D) add the $6,000 to the cost of goods sold reported on the income statement.

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Elizabeth Tucker · Accepted Answer

Final Answer : B, Explanation :  Prepaid expenses are expenses that are paid in advance but are not yet incurred. In this case, the balance in the Prepaid Expenses account increased by $6,000, meaning that the company paid $6,000 for expenses that have not yet been incurred.To adjust the company's net income to a cash basis using the direct method on the statement of cash flows, the $6,000 needs to be added to the selling and administrative expenses reported on the income statement. This is because the direct method starts with net income and then adjusts for non-cash transactions, such as changes in prepaid expenses.By adding the $6,000 to the selling and administrative expenses reported on the income statement, the company's net income will be reduced by the amount of the prepaid expenses that have not yet been incurred. This adjustment will result in a more accurate representation of the company's cash flow for the period.

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