Canadian Securities Course (CSC) Level 1 Practice Exam

What is the purpose of the statement of cash flows?

1. Forecasts future market trends

2. Evaluates market competition

3. Helps evaluate a company's liquidity and solvency

4. Monitors customer satisfaction

The correct answer is: Helps evaluate a company's liquidity and solvency

The statement of cash flows serves a pivotal role in financial reporting by providing insights into a company's cash inflows and outflows over a specific period. Its primary purpose is to help evaluate a company's liquidity and solvency, which are crucial aspects for assessing the financial health of a business. Liquidity refers to a company's ability to meet its short-term obligations, and the cash flow statement reveals how much cash the business generates from its operating activities, as well as how it manages its cash in investing and financing activities. Solvency, on the other hand, is concerned with the company's ability to meet its long-term debts and obligations, which can also be assessed through the information provided in the cash flow statement. While other financial statements, such as the income statement and balance sheet, offer valuable data, the statement of cash flows specifically highlights cash generated and used in the operations, enabling stakeholders to understand how well the company can sustain its operations day-to-day and pay off its liabilities. This makes it an essential tool for investors, creditors, and management to make informed decisions regarding the company's financial stability and operational efficiency.