Certified Financial Management Specialist Practice Exam

Which financial statement tracks cash inflows and outflows of a business?

1. Income Statement

2. Balance Sheet

3. Cash Flow Statement

4. Statement of Financial Position

The correct answer is: Cash Flow Statement

The cash flow statement is specifically designed to track the cash inflows and outflows of a business over a given period. It provides insight into the company's liquidity, showing how cash is generated and used through operating, investing, and financing activities. This statement is crucial for understanding the cash position of the business, as it helps stakeholders assess whether the company can maintain and grow its operations, pay dividends, and cover its liabilities. Operating activities include cash generated from the core business operations, investing activities relate to cash spent or received from investments in assets, and financing activities reflect cash movements related to equity and debt management. In contrast, the income statement focuses on revenues and expenses to show profitability over a specific time frame without detailing cash movements. The balance sheet provides a snapshot of the company's financial position at a specific point in time, showing assets, liabilities, and equity. The statement of financial position is another term for the balance sheet, highlighting the same information regarding the company's resources and obligations. Thus, the cash flow statement stands out as the crucial document for comprehensively tracking the actual cash transactions that significantly impact a company's operations and overall financial health.