A CRITICAL STUDY REGARDING THE ELABORATION OF THE CASH FLOW STATEMENT USING THE DIRECT METHOD IN ROMANIA

Abstract

The direct method, which is the subject of this study, involves the identification and inclusion in the statement ofcash flows of the encashments and the payments made by the company. Although IAS 7 recommends the usage of thedirect method to prepare the cash flow statement in order to better satisfy the informational need of information users,many enterprises choose to apply the indirect method, due to its simplicity. On this issue we support the idea that thedirect cash flow reporting format, relative to the indirect method, leads to better prediction of future firm performanceand has a stronger association with share prices.One important conclusion of our paper is that the decision of theusers of accounting information, taking into account the cash flows generated by the economic entity, will not relievethem entirely from the effects of manifestation of the unexpected, but certainly reduces their magnitude. It is our beliefthat all Romanian companies whose financial statements are addressed to a large number of potential users shouldprepare comprehensive annual financial statements, whether or not the law requires them.

Keywords

• The statement of cash flows in Romania
• the direct method
• the indirect method
• IAS 7