What are the three sections of the statement of cash flows and their purpose?

• A. Sales, costs, and profits; show profitability
• B. Operating activities, investing activities, financing activities; show cash receipts and payments
• C. Present value, future value, and net present value; show time value of money
• D. Assets, liabilities, and equity; show financial position

Answer: (D)

The statement of cash flows groups cash movements into three activities to show how cash enters and leaves the business. The three sections are operating activities, investing activities, and financing activities. The purpose is to present cash receipts and payments by category, so you can see how cash is generated from day-to-day operations, how cash is tied up in or released from long-term assets, and how financing activities affect the company’s cash position.

Operating activities cover the cash effects of the core business—receipts from customers and payments to suppliers and employees—reflecting the cash impact of the income statement. Investing activities include cash used for or received from buying and selling long-term assets like equipment or investments. Financing activities involve cash flows from activities that alter the company’s borrowing or equity structure, such as obtaining loans, issuing stock, repaying debt, or paying dividends.

The other descriptions correspond to different financial statements: one describes profitability rather than cash flow movements, another relates to time value of money concepts, and the last aligns with the balance sheet’s view of financial position.