What is the primary purpose of a cash flow statement?

The primary purpose of a cash flow statement is to indicate liquidity through cash inflows and outflows. This financial statement provides a comprehensive overview of how cash is generated and used during a specific period, showing how well a company manages its cash to fund its operations, pay its debts, and invest in its future.

By tracking cash movements, the cash flow statement helps stakeholders assess the company's ability to meet short-term obligations and overall financial health. Unlike other financial statements, such as the income statement, which focuses on profitability, the cash flow statement emphasizes the actual cash available. This focus on liquidity is crucial because profitability does not always equate to cash availability. A company could be profitable on paper while struggling to maintain enough cash for daily operations.

Understanding cash flow provides valuable insights into the timing and certainty of cash generated from operating, investing, and financing activities, making it an essential tool for stakeholders like investors, creditors, and management to evaluate the financial viability of a business.