What is the purpose of the Cash Flow Statement?

• A. To show profitability over a period
• B. To show a snapshot of the company's financial position
• C. To track changes in cash balance over time
• D. To summarize stockholders' equity

Answer: (C)

The Cash Flow Statement serves the fundamental purpose of tracking changes in a company's cash balance over time. This financial statement provides insight into how cash is generated and used in the business operations, investing activities, and financing activities during a specific period. By categorizing cash flows into these three sections, it allows stakeholders to assess the company's liquidity, solvency, and financial flexibility.

Understanding cash flow is crucial because it reflects the actual cash available to a company, which can differ significantly from net income due to non-cash transactions such as depreciation or changes in working capital. This aspect is vital for investors, creditors, and management alike as it aids in evaluating the ability to maintain and grow operations, pay debts, and reinvest in the business. Through this tracking of cash balances, the Cash Flow Statement compliments other financial statements, including the Income Statement and Balance Sheet, by providing a clearer picture of the company's cash management and operational efficiency.