What is the primary purpose of the cash flow statement?

The primary purpose of the cash flow statement is to indicate the liquidity position of a company. This financial statement provides critical information about the cash inflows and outflows during a specific period, allowing stakeholders to assess the company's ability to generate cash and manage its cash resources.

Unlike other financial statements such as the income statement, which focuses on profitability by recording revenues and expenses, or the statement of changes in equity, which details the equity position of the company, the cash flow statement specifically highlights cash movements. It breaks down cash flows into operating, investing, and financing activities, helping users understand how cash is generated and utilized in everyday operations as well as in growth initiatives.

Additionally, while reflecting future earning potentials is valuable, the cash flow statement does not predict future earnings; instead, it shows actual cash transactions that have occurred, thereby providing a snapshot of a company's current liquidity status. This information is essential for managing day-to-day operations and determining short-term financial health.