Given its a game, there is no right or wrong way to approach the situation.
Personally speaking, i use the flag chart that others mentioned above. Once either my crew or I identify a ship, i go to periscope depth and creep in on her and do my best to identify the type of ship as well as the flag she is flying.
I suppose if you play the way i do when it comes to picking your targets it may become frustrating. I cant tell you how many juicy merchants I've crept up on, only to see they are flying a neutral flag.
The whole prize rule thing confuses me (mostly because i have not yet read into it much) but you can't really identify the type of cargo being carried in the game anyway. That's another reason i stay away from neutral ships and send enemy ships to the bottom
