What is the purpose of the statement of cash flows?

What is the purpose of the statement of cash flows?

• A. Shows how you go from beginning to ending cash balance
• B. Reports net income for the period
• C. Lists accounts payable and receivable
• D. Calculates depreciation expense for assets

Answer: (A)

The statement of cash flows is about showing how cash moves during a period and how the cash balance changes from the start to the end of that period. It breaks cash flows into operating, investing, and financing activities and reconciles the beginning cash balance to the ending cash balance. This focus on actual cash inflows and outflows helps you assess liquidity and the company’s ability to generate cash to fund operations, debt payments, and dividends. Net income, listed on the income statement, is not the purpose of this statement. Accounts payable and receivable are balance-sheet items, not a cash-flow listing, though changes in them affect operating cash flows. Depreciation is a noncash expense that affects net income and is adjusted in the operating activities section, not calculated as the statement’s primary purpose.

The statement of cash flows is about showing how cash moves during a period and how the cash balance changes from the start to the end of that period. It breaks cash flows into operating, investing, and financing activities and reconciles the beginning cash balance to the ending cash balance. This focus on actual cash inflows and outflows helps you assess liquidity and the company’s ability to generate cash to fund operations, debt payments, and dividends.

Net income, listed on the income statement, is not the purpose of this statement. Accounts payable and receivable are balance-sheet items, not a cash-flow listing, though changes in them affect operating cash flows. Depreciation is a noncash expense that affects net income and is adjusted in the operating activities section, not calculated as the statement’s primary purpose.