What is the purpose of a statement of cash flows?

The statement of cash flows serves the fundamental purpose of providing detailed information about the cash inflows and outflows of a business over a specific period. This financial statement categorizes cash activities into three major sections: operating, investing, and financing activities.

By doing so, it helps users—such as management, investors, and creditors—understand how a company manages its cash position, how it generates cash, and how it spends cash. This insight is critical because even a profitable company may struggle if it does not have enough cash flow to meet its obligations.

Understanding the movements of cash allows stakeholders to assess the liquidity and financial health of the business, which is essential for making informed financial decisions and forecasts about future cash needs. Consequently, the statement of cash flows is vital in illustrating the firm's cash management strategies and operational efficiency.