CFA Practice Question

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CFA Practice Question

In calculating the cash payments for other operating expenses, which of the following items must a company add to the other operating expenses reported on the income statement?
A. An increase in prepaid expenses
B. A decrease in prepaid expenses
C. Depreciation and amortization expenses
Explanation: An increase in prepaid expenses must be added to the other operating expenses reported on the income statement to calculate the cash payments for other operating expenses. An increase in prepaid expenses represents an outflow of cash that is not yet reported on the income statement as an expense.

User Contributed Comments 13

User Comment
kalps I think the answer is actually A right judging by the answer
shasha no, believing the answer B is correct, however, the explanation's first word should be "An decrease in prepaid...", typo i think. increase in prepaid: cash outflow not yet recorded as expense in P&L; decrease in prepard: move the decreased amount from prepaid account to expense item in P&L.
fielddar I agree that A is the right answer. if your prepaid expenses are increasing, that means you have a cash outflow that has not yet been recognized on the income statement.
araggl A is right.
google A IS RIGHT
geet Prepaid expenses are in the asset account. If there is a decrease in prepaid expense over the year, it has to be added back to the income statement....just like accounts receiveable, inverntory..etc. I think the answer is B.
murli A is right, exactly follow the Cash Flow concept i.e. adj. of change in working capital.
Dominikk Generally the answer depends on what you mean by "adding to expense". Expenses are with minus in cash flow statement, so an increase in prepaid expenses (asset) decreases the total cash flow (so here answer B would be correct if you understand it that way), but increases your absolute value of expenses (so result is answer A).
Lucho The question is straight forward... expenses reported on the income statement... hence the correct answer is A.
CoffeeGirl The question is saying, which of following will be added back into the cash from operation. A: increase in prepaid expense indicating cash outflow, but it is not shown as expense on income statement. B: decrease in prepaid expense. no cash impact. Decrease in amortization expense; deducted from cash flow from operation.
mishis B would be corect under indirect method of computing CFO, however, question asks what should be added to other expenses, not NI, therefore A is correct.
student111 perfect answer mishis, thanks :)
ascruggs92 Prepaid expenses appear as an asset on the balance sheet because the cash outflow has occurred but the expense has not been realized. Therefore, A is correct because it is a cash payment of operating expenses that is not reflected on the income statement.

A decrease in prepaid expenses is already reflected on the income statement and would need to be removed from operating expenses because it does not represent a cash outflow, just the realization of the expense in that period.
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