What is the purpose of the Statement of Cash Flows?

The Statement of Cash Flows serves a critical function in financial accounting by providing detailed information about a company's cash inflows and outflows over a specific period. This financial statement breaks down cash activities into three main categories: operating, investing, and financing activities.

Understanding these inflows and outflows is essential for assessing a company’s liquidity, solvency, and overall financial health. Unlike the income statement, which focuses on income and expenses and may include non-cash items, the Statement of Cash Flows concentrates purely on cash transactions, offering insights into how cash is generated and utilized within the company.

This information is valuable for stakeholders, including investors, creditors, and management, as it reveals the company’s ability to generate cash and meet its obligations, fund operations, and invest in growth opportunities. By highlightings cash-basis performance, the Statement of Cash Flows complements other financial statements and helps provide a complete picture of financial health.