A major purpose of the statement of cash flows is to accomplish which of the following? 2 points A) Evaluate only the company’s ability to have sufficient cash for short-run needs B) Assess only the company’s ability to meet its obligations and pay dividends C) Assess only the cash aspects of the company’s investment and financing transactions for the period D) All of the above
The correct answer and explanation is:
The correct answer is D) All of the above.
The statement of cash flows is an essential financial document that provides a detailed view of a company’s cash inflows and outflows over a specific period. Its primary purpose is to evaluate the liquidity, financial flexibility, and overall cash position of the business.
- Evaluate the company’s ability to have sufficient cash for short-run needs: This part of the statement helps to assess whether the company has enough cash to meet immediate operational expenses. By analyzing cash flows from operating activities, one can determine if the company is generating enough cash from its core operations to cover short-term obligations such as paying suppliers, employees, or creditors.
- Assess the company’s ability to meet its obligations and pay dividends: The statement also reveals whether a company can meet its long-term obligations. Cash flows from financing activities show how the company is financing its operations through borrowing or issuing equity. It also shows whether there is enough cash to pay dividends, which reflects the company’s profitability and its ability to reward shareholders.
- Assess the cash aspects of the company’s investment and financing transactions for the period: The investing activities section of the statement outlines how the company is using its cash to invest in long-term assets, such as purchasing equipment or acquiring other businesses. Financing activities reflect how cash is raised through debt or equity, and how the company is repaying its debts or paying dividends to shareholders.
In summary, the statement of cash flows provides valuable insights into all aspects of a company’s cash transactions, including its ability to handle short-term needs, meet obligations, pay dividends, and manage its investing and financing activities.