Operating expenses do not match the amount of cash paid to employees, suppliers, and others for goods and services during a period. Describe the three adjustments that must be made to operating expenses to arrive at the cash outflow
1. An adjustment for changes in prepaid expenses, such as prepaid insurance or prepaid rent. If prepaid assets increase during the accounting period, more cash will have been paid out than appears on the income statement as expenses. If prepaid assets decrease, the expenses shown on the income statement will exceed the cash spent.
2. An adjustment for changes in liabilities resulting from accrued expenses, such as wages payable and payroll taxes payable. If accrued liabilities increase during the accounting period, operating expenses on the income statement will exceed the cash spent. If accrued liabilities decrease, operating expenses will fall short of cash spent.
3. An adjustment is usually made because certain expenses do not require a current outlay of cash; those expenses must be subtracted from operating expense to arrive at cash payments for operating expenses. The most common expenses in this category are depreciation expense, amortization expense, and depletion expense.
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