What is a cash flow statement?

A cash flow statement is a financial document that outlines the inflows and outflows of cash within a business over a specific period. This statement is crucial for understanding the liquidity of an organization, as it highlights how cash is generated and used, allowing managers and stakeholders to assess the company's cash management practices.

The cash flow statement typically breaks down cash flows into three categories: operating activities, investing activities, and financing activities. Operating activities include cash generated from the day-to-day business operations, investing activities cover cash used for investments in assets, and financing activities involve cash flows related to borrowing and repaying debts and equity transactions.

By providing a comprehensive view of cash management, the cash flow statement helps businesses ensure they have enough cash on hand to meet obligations, support operations, and pursue growth opportunities. This understanding of liquidity is fundamental for making informed financial decisions, which is why this option accurately describes what a cash flow statement is.