Final answer:
Analyzing the statement of cash flows indeed helps determine future external financing needs of a firm. By reviewing all areas of cash flow, firms can plan for borrowing or selling stock to cover necessary funding for operations or expansion.
Step-by-step explanation:
Analyzing the statement of cash flows is crucial for determining the future external financing needs of a business firm. By reviewing the cash flows from operating, investing and financing activities, a firm can assess whether it will need to seek additional funds to maintain or expand operations. Firms face the decision of whether to borrow through banks or bonds, known as debt financing, or to sell stock, known as equity financing. Each method has its advantages and disadvantages, such as interest payments and control over business operations pertaining to debt financing, versus diluting ownership and answering to shareholders when issuing stock.