[IwanttobeaCPA1]

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 is 165,000

My question is why?
I thought the rule for going from Cash to Accrual was the following
Assets- Increase during the period (+), Decrease during the Period (-)
Liabilities- Increase during the period (-), Decrease during the period (+)
So your prepaid expense increases and it’s an asset so it’s added to the 150,000 Cash basis expense, then you have the increase in your liability account of 20,000 which would be a subtraction to your Cash basis expense.
How do the following cash to accrual not apply here?
what would your journal entries be here?
I have
DR Prepaid expense 5,000 CR Expense 5,000
DR Expense 20,0000 CR Accrued Liab 20,000

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The following below is the general rule I think about when I do Accrual to Cash and Vice Versa.

Accrual to Cash

Assets – Increase during the period do the opposite (-), Decrease during the period do the opposite (+)

Liabilities- Increase during the period do the same (+), Decrease during the period do the same (-)

Cash to Accrual (Opposite of what I just did and what we did above in the problem)

Assets – Increase during the period do the same (+), Decrease during the period do the same (-)

Liabilities – Increase during the period do the opposite (-), Decrease during the period do the opposite (+)

[Valar Dohaeris]

Under cash basis, if liabilities increase, you aren't spending cash and the expense event isn't recorded. Thus, expenses are understated (under accrual basis). So, when liabilities increase in cash basis, you're not doing the opposite when you adjust your cash basis Opex to accrual basis; that is, you're not reducing Opex.

It looks like you understand how to find the answer to this problem which is most important.

BEC - 85
AUD - 81
REG - 84
FAR - 7/24/16

[Anonymous]

Its because the $150,000 is the total expense and not net income. So when the prepaid expense increases by $5,000 that means the total expense should be decreased to $145,000. Same goes for the accrued liabilities. It increased by $20,000 so total expenses should be increased by $20,000, bring you to $165,000.

The key is realizing that the $150,000 is only expenses. The formula that you're trying to use works when trying to figure out the net income

[Amortized and Energized]

To echo what DWilliams said, the problem tells you 150,000 cash outflow relates to operating expenses. Your prepaid increases by 5,000, which means 5,000 of the 150,000 you paid isn't a current period expense. So we back it out. We are at 145,000 now. Now on the flipside, accrued liabilities decreased by 20,000 because they relate to the current period and have now been expensed. So a decrease in liabilities leads to an increase in Opex because previously this wasn't accounted for under cash basis. So that's how you get to 165,000.

FAR - Aug 2015 (58), Feb 2016 (81)
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BEC - May 2016 (79)
AUD - Jul 2016
REG - Aug 2016

[mrimkhan]

Hamms 30 got the asset part right. The accrued liab. Increase means they have more expense in the current year and therefore increases opex.

[Author]

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