Cash paid for other Operating Expenses

[alpha668]

CFAI Text Vol 3 P.294 3.2.1.4 Cash paid for other Operating Expenses
I have two questions :
1. Why ”Cash paid for other Operating Expenses” = Other operating expenses - Decrease in Prepaid Expense - Increase in other accrued liabilities ?
2. Shall the down payments for purchasing goods or equipment be accounted for as “other operating expenses” ? All prepaid expenses and other accurued liabilities are ”other Operating Expenses” ?
Anyone can help ?

 

[garvitaggarwal]

Hi,
1. We need to calculate flow of cash for that we need to see 3 things:
(a). Other operating expenses from Income statement (As we follow accrual method of accounting this does not necessarily meaan outflow of cash. So we need to adjust it for amount which was not incurred in cash means for which other liabilities account was used.
(b) Changes in Other accrued liabilities For example balance in other accrued liabilities account was $1000 in 2011 and it is $ 1200 in 2012. it means that there is an increase in this account by $200. this also signifies that we have not paid cash for other operating expenses that was incurred in 2012 and which are included in (a) above.
As we know now that $200 did not resulted in cash outflow we should deduct it for calculating cash flow.
(c) Changes in prepaid expenses As we somtimes pay the expenses in advance it will result in cash flow but it will not be shown in Income statement as the expenses has not accrued till date. but in order to calculate cash flow we need to add any increse in prepaid expenses expenses account.
And when the expense actually accrues (in next year) we dont need to pay cash as we have already paid it earlier we just credit prepaid expense account. this will decrease the balance of prepaid expenses account. As in this year there is no actual cash flow but it has been shown in income statement as other operating expenses we need to deduct it for calculating cash outflow.
2. I think installments paid for accquisition of Capital assets and equipments should be shown under cash flow from Investing activities.
And all prepaid expenses and accrued liabilities are from operating activities only.
Hope this will answer your query.

 

[alpha668]

Thank you for your response !