What is the purpose of the statement of cash flows?

The purpose of the statement of cash flows is to provide a summary of cash inflows and outflows from operating, investing, and financing activities. This statement is essential for understanding how a company generates and uses its cash over a specific period, which is critical for assessing its liquidity, financial flexibility, and overall financial health.

The cash flow statement breaks down the cash movements into three main categories:

1. Operating Activities: This section includes cash transactions related to the company’s core business operations, such as receipts from sales of goods or services and payments to suppliers and employees.

2. Investing Activities: This part covers cash flows associated with the purchase and sale of long-term assets, such as property, equipment, and investments in securities.

3. Financing Activities: This section reflects the cash flows related to transactions with the company’s owners and creditors, such as issuing or repurchasing stock and borrowing money or repaying loans.

By providing detailed insights into these cash flows, the statement helps stakeholders understand how effectively a company manages its cash, which can be a better indicator of financial stability than net income alone.

Understanding this aspect of financial reporting is crucial for analysts, investors, and management, as it provides clarity on how