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Correct Answer: cash flow statement
the financial statement that provides a detailed summary of the cash inflows and outflows over a specific period is called the cash flow statement. unlike other financial statements, such as the income statement or balance sheet, the cash flow statement exclusively tracks the liquidity movement in and out of the business, making it essential for assessing the short-term viability of a company, particularly its ability to pay bills.
the cash flow statement is structured into three main sections, each highlighting different types of cash flow activities:
1. **operating activities**: this section includes transactions from the operational business functions. it shows the cash effects of transactions that enter into the determination of net income, such as cash received from sales of goods and services and cash paid for merchandise, salaries, office supplies, and other operating expenses. it effectively shows how much cash is generated from the company's products or services.
2. **investing activities**: this part reports cash flow from the purchase and sale of assets like plant, property, and equipment, or securities (not including cash equivalents, which are considered operating cash flows). it indicates how much cash is used for investments in the business and how much cash is received from the sale of these investments.
3. **financing activities**: this section includes cash flows related to transactions with the company's owners and creditors. it shows cash generated or spent on fund-raising efforts, such as the issuance of bonds or stocks and the payment of dividends. it reveals how a company finances its operations and growth by managing its capital structure.
understanding the cash flow statement is crucial for stakeholders to assess the firm's liquidity, flexibility, and overall financial performance. by analyzing the cash flow statement, investors can determine if a company has enough liquidity to cover its expenses, which is essential for making informed investment decisions. additionally, it helps in predicting future cash flows by examining the historical data, which is invaluable for budgeting and financial planning.
in conclusion, the cash flow statement serves as a vital tool for management, investors, and creditors to gauge the efficiency at which a company manages its cash position, ensuring that there are enough cash reserves to meet various operational needs and to make sound strategic financial decisions.
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