Question

a. IAS 7 would prefer enterprises to use the direct method of presenting cash flow statement. However, almost all enterprises use the indirect method of presentation. Why do the accounting standard and most companies appear to differ on this issue?

b. Cash flow statements are valuable source of information. However, there are certain important non-cash transactions that may occur during the year which will not be reported in a cash flow statement. Give any four (4) of such transactions.

Answer 1

Answer (a)    IAS 7 prefers enterprises to use direct method of preparing cash flow statement because the direct method is advantageous due to its clear views and more realible numbers, this method is perfect for preparing cash flow statement to present to your shareholders or others who need to know more reliable figures concerning your company finances.

IAS 7 prefers the direct method also because it complies with both generally accepted accounting principles (GAAP) and the standard of international accounting (IAS).

But almost all the enterprises uses indirect method of preparing cash flow statement because it is simple to prepare the cash flow statement using information from the other two common financial statements, the income statement and balance sheet.

(b) Four non-cash transations that will not be reported in cash flow statement are:

1. Purchase of goods on credit.

2. Sale of goods on credit.

3. Purchase of fixed assets by issue of shares.

4. Writing off bad-debts against the provision for doubtful debts.

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