Final answer:
The statement of cash flows is prepared according to the cash basis of accounting, detailing a company's cash inflows and outflows across operating, investing, and financing activities over a certain period.
Step-by-step explanation:
The statement of cash flows is prepared according to the cash basis of accounting. This financial statement provides a summary of the company's cash inflows and outflows over a specific period of time, such as a month, quarter, or year. Unlike the accrual basis accounting, which records income and expenses when they are earned or incurred, the cash basis reflects transactions only when cash is exchanged.
There are three main sections in the statement of cash flows:
- Operating activities
- Investing activities
- Financing activities
Each section details the respective inflows and outflows of cash, providing stakeholders with insight into the company's liquidity and cash management practices.