What is the primary purpose of the Statement of Cash Flows?

The primary purpose of the Statement of Cash Flows is to provide information about cash inflows and outflows during a specific period. This statement offers critical insights into how a company generates and uses cash, which is vital for assessing its liquidity, financial flexibility, and overall financial health. By breaking down cash flows into operating, investing, and financing activities, the statement helps stakeholders understand the sources and uses of cash, enabling better decision-making regarding investments, credit, and operational strategies.

While summarizing all financial operations of a business is essential, it is broader in scope than the focus of the Statement of Cash Flows, which specifically targets cash movements rather than overall financial performance. Presenting the financial position of a business relates to the Balance Sheet, which provides a snapshot of assets, liabilities, and owner’s equity at a specific point in time, rather than the flow of cash over a period. Calculating net income pertains to the Income Statement, which records revenues and expenses, ultimately showing profitability but not the actual cash movement, making the Statement of Cash Flows distinct and crucial in its purpose.