Business Degree Certification Practice Test

What is the primary purpose of the statement of cash flows?

1. To report a company's investing transactions.

2. To report a company's financing transactions.

3. To provide information about cash receipts and cash payments of a company.

4. To show the net increase or decrease in cash.

The correct answer is: To provide information about cash receipts and cash payments of a company.

The primary purpose of the statement of cash flows is to provide information about cash receipts and cash payments of a company. This financial statement is critical because it helps stakeholders understand how a company generates and uses its cash over a specific period. It offers insights into the company's liquidity and financial flexibility, revealing the cash inflows and outflows from operating, investing, and financing activities. By detailing cash-generated activities, stakeholders can assess the company's operational efficiency, financing capabilities, and investment strategies without the impact of non-cash transactions that affect the income statement. This clarity is essential for users of financial statements who need to evaluate the company's cash position and its ability to meet liabilities, invest in growth opportunities, or return capital to shareholders. The other options—reporting investing or financing transactions and showing the net increase or decrease in cash—are components of what the statement of cash flows entails but do not capture its comprehensive purpose. While the statement includes relevant investing and financing activities, its primary aim is to provide a broader overview of all cash movements, offering a complete picture of how cash is managed within the business.