What is the role of the statement of cash flows?

The statement of cash flows plays a vital role in financial reporting by detailing cash inflows and cash outflows for a specific period. This financial statement provides insights into how a company generates and uses its cash, which is crucial for assessing the liquidity, financial flexibility, and overall cash management of the organization.

Investors, creditors, and financial analysts use the statement of cash flows to evaluate a company's cash-generating capabilities and to understand its operational efficiency. The statement is divided into three sections: operating activities, investing activities, and financing activities, allowing users to see where the cash is coming from and how it is being allocated.

By focusing on cash transactions, this statement helps stakeholders understand the company's actual cash position, which is essential for making informed financial decisions. This information complements the income statement and balance sheet, illustrating the relationship between profitability and cash flow management.