format of direct method of cash flow statement

The IAS 7 states that 'An entity shall report cash flows from operating activities using either: (a) the direct method … or (b) the indirect method … entities are encouraged to report cash flows from operating activities using the direct method.' (IAS 7, par. The International and US reporting requirements are similar. At the heart of this debate has been whether to mandate or allow firms the choice of reporting operating cash flows using the indirect or direct method (Clacher et al., 2013). Introduction Debating the form of disclosure of operating cash flows has been central in the development of all cash flows reporting standards over the past three decades. My argument ends with maximizing the benefits is achieved by providing statement of cash flows using both direct and indirect methods.ġ. Otherwise, the company should ask prepares to prepare both methods or use a cost-benefit analysis to determine which method that should be used. If the users of financial statements accept less than 100% accuracy in the statements, then companies can prepare either an indirect or a direct method of statement of cash flows. The results show that we can estimate either the direct method or the indirect method of statement of cash flows but the estimated statement does not give 100% accurate results. This study summarizes the advantages of direct and indirect methods, studies the possibility of using the information available to convert a statement of cash flows using indirect method to direct method, studies the possibilities of using the information available in the financial statement to prepare statement of cash flows using direct method, studies the effect of cost using either method compared with the other one. The purpose of this study is to support one argument of the following: when preparing statement of cash flows, the preparers should use the direct method, the indirect one, or both. Different studies in the literature find that the majority of the companies are using only the indirect method. Both the IASB and the FASB consider the direct method as the preferred method of presenting cash flows from operations.

Both IAS 7 and SFAS 95 allow the option of reporting either the direct or indirect method when preparing statement of cash flows.

Format of direct method of cash flow statement