Which of the following statements about the statement of cash flows is correct?

• A. It reports cash inflows and outflows from operating, investing, and financing activities.
• B. It only includes cash transactions related to revenues and expenses.
• C. It does not reconcile the beginning and ending cash balances.
• D. It is prepared using only the accrual basis of accounting.

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 cash inflows and outflows during a specific period, categorized into operating, investing, and financing activities.
2. Review the components of the statement of cash flows: Operating activities include cash flows related to the core business operations, investing activities involve cash flows from the purchase or sale of long-term assets, and financing activities include cash flows from transactions with creditors and investors.
3. Clarify that the statement of cash flows reconciles the beginning and ending cash balances by showing how cash has changed during the period due to the three categories of activities.
4. Note that the statement of cash flows is prepared using the cash basis of accounting, not the accrual basis. This means it only includes transactions that involve actual cash movements.
5. Evaluate the options provided in the problem: The correct statement is the one that accurately describes the statement of cash flows as reporting cash inflows and outflows from operating, investing, and financing activities.