Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

What does a cash flow statement illustrate regarding a company's finances?

1. Only income received

2. How cash is acquired and spent

3. Liabilities and debts

4. Stockholder equity changes

The correct answer is: How cash is acquired and spent

A cash flow statement is a crucial financial document that provides an overview of how a company generates and utilizes its cash over a specific period. It details the inflows and outflows of cash, allowing stakeholders to understand the company’s liquidity and financial health. This statement typically breaks down cash flows into three main categories: operating activities, investing activities, and financing activities. By analyzing these categories, one can see the sources of cash inflow, such as revenue from sales or investments, as well as cash outflows, including expenses and capital expenditures. This comprehensive view of cash movement is vital for assessing the company’s ability to meet its financial obligations, invest in growth opportunities, and return value to shareholders. It goes beyond just tracking income or expenses, as it reveals the actual cash position of the company at any point in time. The other choices do not encapsulate the full essence of what a cash flow statement represents. It is not limited to only recording income received, nor does it focus solely on a company's liabilities and debts or changes in stockholder equity. Those elements are important aspects of overall financial reporting, but they are better reflected in other statements, such as the income statement or the balance sheet.