What is the purpose of a cash flow statement?
A. To plan future expenses and allocate savings.
B. To provide a snapshot of financial position at a specific point in time.
C. To detail the movement of cash in and out of your accounts, showing changes in your cash balance.
D. To list all potential sources of income for a business venture.
Answer (2)
The purpose of a cash flow statement is to detail the movement of cash in and out of an entity's accounts, showing changes in cash balance over a specific period. This statement is essential for understanding financial health and making informed financial decisions. The correct answer is C.
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The purpose of a cash flow statement is to detail the movement of cash in and out of your accounts, showing changes in your cash balance. Therefore, the correct answer is c.
The cash flow statement is one of the three main financial statements used by businesses, alongside the income statement and the balance sheet. It provides a detailed summary of the inflows and outflows of cash during a specific period, usually categorized into three main activities:
Operating Activities : These include cash transactions related to a company’s core business activities, such as sales revenue and expenses. This helps assess if the company can generate sufficient cash flow from its operations to sustain and grow the business.
Investing Activities : These involve cash flows from buying or selling long-term assets like property, equipment, or investment securities. This section helps investors understand the company’s investment in resources that will drive future growth.
Financing Activities : This section details cash transactions related to borrowing or repaying debts, issuing stock, or paying dividends. It helps assess how the company finances its operations and growth.
By showing all the cash transactions in one place, cash flow statements help stakeholders understand how well the company manages its cash position, which is crucial for meeting obligations, planning future expenses, and making strategic decisions. It provides a clear picture of the liquidity and financial flexibility of a business, which is essential for investors, managers, and creditors alike.
In summary, the cash flow statement is a vital financial tool that provides insights into how well a company is managing its cash resources.
