What is the purpose of a cash flow statement?

The purpose of a cash flow statement is to track the inflow and outflow of cash over a specific period. This financial document provides insights into how cash is generated and used within a business, highlighting its liquidity and overall financial health. By detailining the sources of cash (such as operating activities, investments, and financing) and the uses of cash (such as operating expenses, capital expenditures, and debt repayments), a cash flow statement helps stakeholders assess the company’s ability to meet its short-term obligations and manage cash resources effectively. This tracking of cash movements is essential for making informed business decisions, budgeting, and forecasting future cash needs.

While detailing long-term investments and liabilities focuses on the balance sheet and summarizing revenues and expenses pertains to the income statement, the cash flow statement serves a distinct and critical purpose in understanding the cash dynamics of a business. Evaluating the total net worth of a business relates to its overall value, which is not the primary objective of the cash flow statement.