Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding and Using Published Cash Flow Data

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Analysing Direct Cash Flow Statements

This chapter explains the nature of direct cash flows, the difference between indirect and direct cash flows and how to analyse them into Jury’s Cash Flow Template.

IAS 7 – Cash Flow Statements – gives preparers the option of reporting cash flows using the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed, or the indirect method.

The standard goes on to say, ‘Entities are encouraged to report cash flows from operating activities using the direct method. The indirect method provides information which may be useful in estimating future cash flows and which is not available under the indirect method.’ Later on in the chapter we will see whether this advice is acted upon.

Direct cash flows are rare, I have never yet seen an example from the UK, US, Germany or France and indeed many other countries, all of which seem to prefer to use the indirect method for preparing cash flow statements.

When they do appear in the published accounts of large businesses it is usually because the local GAAP used to prefer it or required it, and this habit has been continued when IAS GAAP was adopted. So the same information forms the published cash flow statement for the annual report and any filings required for US listings such as the form 20-F for overseas filers.

Both of the examples used in this chapter are Portuguese listed companies, as Portuguese companies generally continue to offer direct cash flow statements ...