Question

What is the purpose of a statement of cash flows? How does it differ from a balance sheet and an income statement?

Short answer

A cash flow statement is prepared to provide thorough information on all the cash transactions and their classification. It is different from the income statement and balance sheet becauseit is prepared using the cash basis of accounting.

Step-by-step solution

Definition of Income Statement

The statement depicting the profitability of the business entity by reporting all the sacrifices made by the business and the benefits generated from the business operations is known as an income statement.

Purpose of Statement of Cash Flow

The primary purpose of the cash flow statement is to provide detailed information on all the cash receipts and disbursement of the business entity.

Difference Between Cash Flow and Income Statement and Balance Sheet

1. Cash flow differs from the income statement and balance sheet because it categorises all the cash transactions into three activities: financing, operating, and investing.
2. Cash flow differs from the income statement and balance sheet because it is prepared using the cash basis of accounting. In contrast, balance sheets and income statements are prepared using the accrual basis of accounting.