Cor pora te rep or ti n g

(2 marks – 1 mark if reference is only made to non-cash items) 
Under the direct method, cash generated from operations is disclosed by showing 
major classes of gross cash receipts and gross cash payments.
(1 mark) 
For example, under the direct method, the entity will disclose ‘cash receipts from 
customers’, ‘cash paid to suppliers’ and ‘cash paid to employees’. 
(1 mark) 
Both methods, if faithfully represented, will derive the same figure for cash 
generated from operations.
 (1 
mark)
However, IAS 7 
Statement of Cash Flows 
encourages entities to report cash 
generated from operations using the direct method. 
(1 mark) 
This is because the direct method provides information that might be useful in 
estimating future cash flows. 
(1 mark) 
The categories disclosed under the direct method are likely to be more easily 
understood by the users of the financial statements than those disclosed in the 
indirect method. 
(1 mark)

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REV IS ION MO CK A ANSWERS 
K APLAN P UBLISH IN G 
9
The users of the financial statements can make more meaningful comparisons 
between cash flows presented using the direct method year-on-year. 
(1 mark) 
It is also easier to compare two separate companies if they have both used the direct 
method in preparing their statement of cash flows.