Assignment Of HUM Products Limited Using The Indirect Method

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Name – Rohit Kumar
Student ID – 3187308
Assignment number 1

Answer to Question 1 part 1 – Please find below Statement of Cash Flow for the year ended December 31, 20X4, of HUM Products Limited using the indirect method –

Supplemental Disclosures –
Restructuring cost paid this year is $700
Interest paid for the year 20X4 is $21,200
Income taxed paid for the year 20X4 is $11,900
Current portion of long term debt has been treated as working capital as it is a current liability.

Calculations are given on the next page.
Calculations –

1) Cash Paid for Income Tax in current year
Income Tax Payable (Opening Balance) $25,500
Add: Income tax of current year $17,000
Less: Income Tax Payable Closing Balance ($30,600) Income Tax Paid in current year $11,900

2) Property, plant and equipment purchased Opening balance $140,400
Less: Depreciation ($35,800) _____________________________ $104,600 Less: Closing balance ($159,800) __________________________________________
Property, Plant and equipment purchased this year ($55,200)

3) Intangible assets purchased Opening balance $276,400
Less: Amortized this year ($10,400) _____________________________ $266,000 Less: Closing balance ($368,900) __________________________________________
Property, Plant and equipment purchased this year ($102,900)

4) Dividend Paid
Retained earnings opening Balance $708,200
Plus: Net earnings this year $96,500 _____________________________________ $804,700
Less: Retained earnings closing balance ($744,700) _______________________________________ $60,000

Answer to Question 1 part 2 – Please find below the operating activity section of the Statement of Cash Flow for the year ended December 31, 20X4, of HUM Products Limited using the Direct method –

Supplemental Disclosures –
Restructuring cost paid this year is $700
Interest paid for the year 20X4 is $21,200
Income taxed paid for the year 20X4 is $11,900
Current portion of long term debt has been treated as working capital as it is a current liability.

Answer to Question 1 part 3

If HUM elects to classify Interest and dividend paid as financing activity, it will decrease the cash used by Operating Activity to -$39,100 and on the other hand it will also decrease the cash provided by the financing activity to $206,600 as shown below –

Answer to Question 1 part 4

If HUM elects to classify Interest and dividend paid as operating activities, it will increase the cash used by Operating Activity to -$120,300 and on the other hand it will also increase the cash provided by the financing activity to $287,800 as shown below –

Answer to Question 1 part 5
Overview – HUM is a consumer products Company is currently evaluating alternative presentation options for Cash Flow Statements.

Issues – The following issues has been raised by the CFO of the company.

Direct method or indirect method, they have always used indirect method
Presenting dividends and interest paid in the operating versus financing sections
Development Costs – Expensed Vs Capitalized

Analysis –

Direct or Indirect – As per the accounting standards any method, direct or indirect can be used to present cash flow from operating activities. But it is often argued that that the direct approach is preferred by the financial statement readers because it has more clarity and they don’t have to untangle the adjustments made under the indirect approach.

Dividend and interest paid, Financing or operating – If HUM Classifies dividend and interest paid as operating activity, it will reduce the cash inflow from Operating activity and then company has to rely on short term loans or other ways of financing. Lender, investor or
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