A statement of cash flows is often one of the most used and least understood of the key financial statements. However, it is a vital report to use when evaluating or analyzing a company. Identifying where a company is receiving and using its cash—through operations, investing, and financing activities—is more important than knowing the company’s net income:
- Describe the types of accounts/transactions in each section of the statement of cash flows.
- Explain how the net effect of cash used in each activity will help to evaluate liquidity, solvency, and financial flexibility.
- Explain why this statement is necessary even when a company has substantial net income.
- Substantiate your response with examples.