The cash flow statement shows how much cash is available. Which statement best describes its scope?

• A. It traces cash flows from operating, investing, and financing activities to explain the net cash position
• B. It reports only cash on hand at year-end
• C. It records the company's profits and losses
• D. It forecasts future cash needs

Answer: (A)

The cash flow statement is about actual cash movements, showing how cash enters and leaves the business across three activities—operating, investing, and financing—and how those movements change the cash balance over the period. It reconciles the beginning cash to the ending cash by adding net cash from operating, investing, and financing activities, which gives a clear view of liquidity and how the company funds its activities. This isn’t just a snapshot of cash on hand at year-end—that’s a balance sheet item—nor does it record profits and losses (that’s the income statement), nor does it forecast future cash needs (that’s budgeting). By detailing the cash effects of day-to-day operations, investments in assets, and financing actions like debt, equity, and dividends, the statement explains the net change in cash and ties back to the ending cash shown on the balance sheet.