Which statement shows cash inflows and outflows, indicating liquidity?

Which statement shows cash inflows and outflows, indicating liquidity?

• A. Balance sheet
• B. Income statement
• C. Cash flow statement
• D. Notes to financial statements

Answer: (C)

Liquidity is about how much cash is available to meet obligations. The cash flow statement directly tracks cash receipts and cash payments over a period, breaking them into operating activities, investing activities, and financing activities. This shows the net change in cash and the ending cash balance, giving a clear picture of how well the business can cover short-term obligations. In contrast, the balance sheet shows assets and liabilities at a single point in time, not how cash moved during the period; the income statement reports profitability using accrual accounting rather than actual cash, and notes provide supplementary details. So, because it focuses on actual cash movements and the resulting cash position, the cash flow statement best indicates liquidity.

Liquidity is about how much cash is available to meet obligations. The cash flow statement directly tracks cash receipts and cash payments over a period, breaking them into operating activities, investing activities, and financing activities. This shows the net change in cash and the ending cash balance, giving a clear picture of how well the business can cover short-term obligations.

In contrast, the balance sheet shows assets and liabilities at a single point in time, not how cash moved during the period; the income statement reports profitability using accrual accounting rather than actual cash, and notes provide supplementary details. So, because it focuses on actual cash movements and the resulting cash position, the cash flow statement best indicates liquidity.