Which method is preferable to prepare Statement of Cash Flows?


International Accounting Standard (IAS) 7 Statement of Cash Flows give entity the choice to choose freely in selecting the method to prepare statement of cash flows. Moreover, IAS 7 does not bound entities or types of entities to follow a particular method for reporting cash flows during the period nor it mentions any set of circumstances under which a specific method is required to be followed.

A point to remember is that choice of method will only affect the way cash flows from operating activities are determined and this choice has absolutely no effect on the computation of cash flows from investing and financing activities.

But IAS 7 does encourage entities to use direct method for reporting cash flows from operating activities. The reason is that the information provided in statement of cash flows prepared under direct method helps users to predict future cash flows and such information is not available if statement of cash flows is prepared under indirect method.

In practice however, almost all the entities follow indirect method to report of cash flows from different business activities in a complete set of financial statements.