Which of the following is NOT correct about the statement of cash flows?

• A. It helps users assess a company’s ability to generate future cash flows.
• B. It reports cash inflows and outflows from operating, investing, and financing activities.
• C. It shows the company’s profitability over a period of time.
• D. It is prepared using information from the income statement and balance sheet.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the purpose of the statement of cash flows. The statement of cash flows is designed to provide information about a company’s cash inflows and outflows during a specific period, categorized into operating, investing, and financing activities. It helps users assess the company’s ability to generate future cash flows and manage cash effectively.
2. Step 2: Analyze the incorrect statement provided in the options. The statement 'It shows the company’s profitability over a period of time' is not correct because profitability is measured using the income statement, not the statement of cash flows. The cash flow statement focuses on cash movements, not profitability.
3. Step 3: Review the correct statements about the statement of cash flows. These include: (a) It helps users assess a company’s ability to generate future cash flows, (b) It reports cash inflows and outflows from operating, investing, and financing activities, and (c) It is prepared using information from the income statement and balance sheet.
4. Step 4: Compare the incorrect statement with the correct ones. The incorrect statement confuses the purpose of the cash flow statement with that of the income statement, which is specifically designed to show profitability over a period of time.
5. Step 5: Conclude that the correct answer is the statement 'It shows the company’s profitability over a period of time,' as this does not align with the purpose of the statement of cash flows.