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

The primary purpose of the statement of cash flows is to provide information about a company’s cash inflows and outflows over a specific period. This financial statement is crucial as it highlights how cash is generated and used in a business across three key activities: operating, investing, and financing. It helps stakeholders understand the liquidity and financial flexibility of the company, which is essential for assessing its ability to meet short-term obligations and maintain operations.

By focusing on cash transactions rather than on revenue or expenses alone, the statement of cash flows paints a clearer picture of the financial health of a company. It allows investors and analysts to gauge the effectiveness of management in generating cash and managing cash for current and future needs, making it a vital part of the overall financial reporting process.