Title

Determinants of the Choice of Reporting the Direct Method or Indirect Method of Cash Flow from Operating Activities: Malaysian Evidence

Abstract
This study examines the incentives motivating listed companies in Malaysia to voluntarily choose the Direct Method over the Indirect Method in reporting cash flow from operating (CFO) activities in their 1997 annual financial reports following the adoption of the IAS 7 (Revised) Statement of Cash Flows (SCF). Adopting the signaling perspective, the general hypothesis of this study is that the choice of the Direct Method over the Indirect Method in reporting CFO activities is to maximize a firms value via engagement in quality signaling to the market. Based on the results from the univariate and multivariate analyses, we found all variables to be in the hypothesized directions.

Previous Research
A number of previous studies have been conducted in Malaysia and elsewhere that examine the issue related to the Direct Method and the Indirect Method in reporting CFO activities in the SCF. These include Ahmad and Hassan (2001), (Krishnan and Largay III (2000), (Jones and Widjaja (1998), Jones and Ratnatunga (1997), McEnroe (1996), Hung, Chan and Yiu (1995), Jones et al. (1995), and Kundari et al. (1995).

Hypothesis:
H1: Firms with higher level of managerial efficiency are more likely to voluntarily choose the Direct Method in reporting the CFO activities than firms with lower level of managerial efficiency. H2: Firms with lower level of financial risk are more likely to voluntarily choose the Direct Method in reporting the CFO activities than firms with higher level of financial risk. H3: Larger firms are more likely to voluntarily choose the Direct Method in reporting the CFO activities than smaller firms. H4: Firms whose accounts are audited by a member of the big-6 are more likely to voluntarily choose the Direct Method in reporting the CFO activities than firms whose accounts are not audited by a member of the big-6.

Research Design:
The research hypotheses of this study include both the univariate and multivariate methods. The univariate tests used were the one-tailed 2-independent sample t-tests for interval-scaled variables, and the chi-square for the ordinal-scaled variables. The multivariate test used is the logistic regression.
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References:
Abdul Latif, R. (1997). Cash flow statement: Is it more than fine-tuning? The Malaysian Accountant, February, pp. 4-8. Ahmad, Z. & Hassan, S. (2001). Malaysian cash flow reporting: Direct method vs. indirect method. Paper presented at the 13th Asian-Pacific Conference on International Accounting Issues, Rio de Janeiro, Brazil. Companies Act 1965 (Act 125) (Malaysia).

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