Business Degree Certification Practice Test

Which financial statement provides insights into the cash flow activities of a business?

1. Balance Sheet

2. Statement of income

3. Statement of cash flows

4. Statement of shareholders' equity

The correct answer is: Statement of cash flows

The statement of cash flows is the financial statement that offers insights into the cash flow activities of a business. It provides a detailed account of the cash generated and used during a specific period within three primary categories: operating, investing, and financing activities. This statement is crucial for understanding how a company manages its cash inflow and outflow, reflecting its liquidity and overall financial health. It shows how well a company can generate cash from its operations, the cash used for investment activities, like purchasing equipment or making acquisitions, and how much cash is raised from or paid to investors and creditors. In contrast, while the balance sheet presents a snapshot of a company's assets, liabilities, and equity at a specific point in time, it does not detail cash flows. The statement of income focuses on revenues and expenses, measuring profitability rather than cash activity. Lastly, the statement of shareholders' equity outlines changes in equity but does not provide direct information regarding cash flows. Thus, the statement of cash flows is specifically tailored to illuminate the cash movements within a business.