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C is corrent because it subtracts the yearly change in prepaid expenses from and adds the yearly change in accrued liabilities to the cash operating expenses to arrive at accrual-basis operating expenses. The cash paid for operating expenses is $150,000. Because prepaid expenses increased by $5,000 (end of year of $15,000 less beginning of year $10,000), this amount is not included in accrual-basis expenses. The accrued liabilities increased from $5,000 at beginning of the year to $25,000 at the end of the year, indicating that an additional $20,000 of liabilities were incurred and not yet paid. To convert to accrual-basis operating expenses, the cash paid of $150,000 is adjusted by subtracting the increase in the prepaid expense account, and adding the increase in accrued liabilities. ($150,000 – 5,000 + 20,000 = $165,000).
A is incorrect because it adds both yearly changes in prepaid expenses and accrued liabilities to cash operating expense to arrive at accrual operating expenses ($150,000 + $5,000 + $20,000 = $175,000).  To convert to accrual-basis operating expenses, the cash paid of $150,000 is adjusted by subtracting the increase in the prepaid expense account, and adding the increase in accrued liabilities. ($150,000 – 5,000 + 20,000 = $165,000).  
B is incorrect because it ignores the yearly change in prepaid expenses and accrued liabilities and subtracts the end-of-year prepaid expenses from cash operating expenses to arrive at accrual-basis operating expense ($150,000 – $15,000 = $135,000).  To convert to accrual-basis operating expenses, the cash paid of $150,000 is adjusted by subtracting the increase in the prepaid expense account, and adding the increase in accrued liabilities. ($150,000 – 5,000 + 20,000 = $165,000).  
D is incorrect because it subtracts both the prepaid expenses yearly change and accrued liabilities yearly change from the cash operating expense to arrive at the accrual-basis operating expenses ($150,000 – $5,000 – $20,000 = $125,000).   To convert to accrual-basis operating expenses, the cash paid of $150,000 is adjusted by subtracting the increase in the prepaid expense account, and adding the increase in accrued liabilities. ($150,000 – 5,000 + 20,000 = $165,000).