Which of the following is a primary purpose of cash flow statements?

• A. To show profits do not always equal cash.
• B. To show the cash inflows and outflows during the past year.
• C. To help predict future cash flows.
• D. To comply with legal requirements (Companies Act).

Answer: (B)

The key idea here is that a cash flow statement is all about actual cash movements in a period. Its main purpose is to show the cash inflows and outflows during the past year, so users can see how cash was generated and used and how this affected liquidity. This helps explain why profits don’t always align with cash, since many items that affect reported profit don’t involve cash at the same time (for example, credit sales or non-cash expenses). The statement typically breaks cash flows into operating, investing, and financing activities, giving a clear picture of how cash was produced and spent to support the business. While forecasting future cash flows or meeting legal reporting requirements are relevant considerations, they are not the primary purpose of presenting the actual cash movements for the period.