The purpose of a statement of cash flows is to provide information about the:

• A. cash receipts and cash payments of an entity during a period
• B. profitability of an entity over a period
• C. changes in equity of an entity during a period
• D. financial position of an entity at a specific point in time

Answer: (A)

Verified step by step guidance

1. Understand the purpose of the statement of cash flows: It is a financial statement that provides information about the cash inflows (receipts) and cash outflows (payments) of an entity during a specific period.
2. Recognize that the statement of cash flows focuses on cash transactions, not profitability, equity changes, or financial position. These aspects are covered by other financial statements such as the income statement, statement of changes in equity, and balance sheet respectively.
3. Identify the three main sections of the statement of cash flows: operating activities, investing activities, and financing activities. Each section categorizes cash flows based on their source or use.
4. Relate the statement of cash flows to decision-making: It helps stakeholders understand how the entity generates and uses cash, ensuring liquidity and solvency are maintained.
5. Conclude that the correct answer is 'cash receipts and cash payments of an entity during a period,' as this aligns with the primary purpose of the statement of cash flows.