Cash Flow Statements

CFA Level I FRA
#1

Could someone explain why the correct answer is C and why my answer of A is wrong.

My logic is since prepaid insurance increased, wouldn’t we use cash to pay for those assets and since utilities payable decreased shoudn’t that also indicate we used cash to bring them down?

Black Ice, a fictitious sportswear manufacturer, reported other operating expenses of $30 million. Prepaid insurance expense increased by $4 million, and accrued utilities payable decreased by $7 million. Insurance and utilities are the only two components of other operating expenses. How much cash did the company pay in other operating expenses?

  1. $19 million.
  2. $33 million.
  3. $41 million.
#2

This question was obviously written by someone who doesn’t really understand accounting. There is no account called “Prepaid Insurance Expense”. There’s Prepaid Insurance, which is an asset, and Insurance Expense, which is an expense. Oh, well.

Your logic is correct, as far as it goes. Yes, we used cash to prepay insurance. Yes, we used cash to reduce utilities payable.

Where you’re stumbling is that we _ also _ used cash for the $30 million in other operating expenses. All three are cash outflows; hence, you add them to get the total cash outflow: $30 million + $4 million + $7 million = $41 million.

#3

Thank you so much for clearing that up!

#4

My pleasure.