What is a "statement of cash flows"?

The statement of cash flows is a financial document that provides a detailed summary of cash inflows and outflows over a specific period. This report is crucial because it helps stakeholders understand how cash is being generated and used within a business. It breaks down cash flow into three main categories: operating activities, investing activities, and financing activities. By analyzing these segments, users can assess a company's liquidity, solvency, and overall financial health.

While evaluating business performance may involve looking at various financial statements, including the income statement and balance sheet, the statement of cash flows specifically focuses on cash management. A ledger of all transactions captures every financial activity but does not provide the summarized cash flow details that are critical for understanding cash availability and operational efficiency. Similarly, tax assessments may rely on financial information but are not directly related to the mechanics or reporting of cash flows. The statement of cash flows stands out as a vital tool for understanding the movement of cash in and out, making it the correct answer.