What is the function of a cash flow statement?

The function of a cash flow statement is to track cash inflows and outflows over a specific period. This financial statement provides valuable insights into the company’s liquidity, showing how cash is generated and used within the business. By detailing cash transactions, it illustrates the company’s ability to meet its obligations, such as paying employees and suppliers, while also identifying the sources of cash, such as operating activities, investing activities, and financing activities.

Understanding cash flow is crucial for both management and external stakeholders. It helps in assessing the operational efficiency of the business and its capacity to generate cash, which is more immediate than profitability as it reflects the actual cash position. This information is essential for budgeting and financial planning, making it a key tool for decision-making.

In contrast, the other options relate to different aspects of financial analysis: profitability evaluates how well a company generates profit relative to its sales, net worth summarizes the assets and liabilities to provide a snapshot of a company's financial health, and assessing market trends involves analyzing external factors that may influence a company's performance. While these aspects are important, they do not encapsulate the primary focus of a cash flow statement.