What is the purpose of a cash flow statement?

The purpose of a cash flow statement is to track cash inflows and outflows over a specific period. This financial statement provides insights into a company’s liquidity and its ability to meet short-term obligations. By detailing where cash is coming from and where it is going, the cash flow statement helps stakeholders understand how well the business generates cash to fund its operations, pay bills, and invest in growth opportunities.

This ability to analyze cash movements is crucial for effective financial management, as it highlights operational efficiency, investment activities, and financing sources. Unlike the income statement, which summarizes revenue and expenses, the cash flow statement explicitly reflects the timing and amount of cash entering and leaving the business, which is vital for assessing financial health and operational performance.

While the other options reflect different aspects of financial reporting, they do not capture the primary focus of a cash flow statement as effectively as the ability to track cash movements.