What is the role of the statement of cash flows?

The statement of cash flows serves a crucial role in financial reporting by providing a detailed account of a company’s cash inflows and outflows over a specific period. This financial statement is vital for assessing the liquidity, flexibility, and overall financial health of a business. It categorizes cash flows into three main sections: operating activities, investing activities, and financing activities.

Understanding cash inflows and outflows helps stakeholders to determine how well a company generates cash to pay its debts and fund its operating expenses. It reveals the company’s capacity to manage cash and effectively supports decision-making by investors, creditors, and management. Unlike other financial statements that may focus on accrual accounting, the statement of cash flows emphasizes actual cash transactions, making it an essential tool for evaluating the timing and certainty of cash flows.

In contrast, the other options focus on different aspects of financial statements that do not capture the specific function of outlining cash movements. For instance, tracking asset depreciation pertains to managing long-term asset valuations, summarizing equity and liabilities is about portraying a particular snapshot of a company's financial position, and projecting future sales revenue involves forecasting which is outside the immediate scope of cash flow assessment.