What is the primary purpose of a cash flow statement?

The primary purpose of a cash flow statement is to summarize the inflows and outflows of cash within a business over a specific period. This statement provides a clear picture of how a company generates cash from its operational activities, how it invests cash into capital assets or projects, and how it finances its operations through borrowing or equity financing.

By detailing cash movements, the cash flow statement helps stakeholders understand the liquidity position of the business, which is essential for assessing the ability to meet short-term obligations, invest in new projects, or distribute dividends to shareholders. It reflects the actual cash position, differentiating itself from the income statement, which may include non-cash items like depreciation or accruals that do not directly affect cash flow.

This focus on cash flows provides invaluable insights, especially when evaluating the financial health of a business, as it highlights the capability to support day-to-day operations and manage financial commitments effectively.