What is the purpose of the cash flow statement?

The cash flow statement primarily serves to provide information about the cash inflows and outflows of a business over a specific period. It is an essential financial statement that helps stakeholders understand how cash is generated and used in the operations, investing, and financing activities of a company.

By detailing cash flows from these different activities, it highlights the liquidity position of the enterprise, making it easier to assess its ability to meet short-term obligations, fund operations, and invest in growth opportunities. This statement complements the balance sheet and income statement by focusing solely on cash movements, which are critical for maintaining business solvency.

Understanding the cash flow statement enables decision-makers to evaluate the organization’s cash management practices, as well as forecasting future cash needs. This insight is crucial because profitability shown on the income statement does not always equate to cash availability; hence, the cash flow statement provides a clearer picture of actual cash availability for operating, investing, and financing activities.