What is the primary purpose of a cash flow statement?

The primary purpose of a cash flow statement is to provide insight into the company’s liquidity and cash operations. This financial statement details how cash is generated and used during a specific period, allowing stakeholders to understand the company’s cash inflows and outflows from operating, investing, and financing activities.

This understanding of liquidity is crucial as it helps assess the company’s ability to meet its short-term obligations, invest in future growth, and withstand financial challenges. By analyzing cash flows, stakeholders can evaluate whether the company is generating sufficient cash to sustain its operations, pay its debts, and distribute dividends to shareholders.

In contrast, summarizing the company’s profits relates to the income statement, which focuses on revenues and expenses rather than the actual cash movements. Reporting the balance of assets and liabilities falls under the balance sheet, which provides a snapshot of the company’s financial position at a particular time but does not detail cash flow. Showing the tax obligations of the company is a specific aspect of financial reporting that may be reflected in multiple areas but is not the primary focus of a cash flow statement.