Final answer:
The statement of cash flows explains changes in cash and equivalents, providing insights into a company's liquidity over time. It doesn't directly report on retained earnings, non-cash items, or net income, but their effects may be evident in the statement.
Step-by-step explanation:
The statement of cash flows explains changes in cash and equivalents. This financial statement provides a detailed analysis of how a company's cash position changes over a period. Contrary to some common misperceptions, it does not detail changes in retained earnings, non-cash items, or net income directly, although these elements can indirectly affect the cash flow statement by reflecting operations or financing activities that impact cash.
To understand this further, we can look at the components of money supply, such as M1, which includes cash and coins in circulation, checkable bank deposits, and travelers checks, and M2, which extends M1 to include savings accounts, small CDs, and money market mutual funds. These definitions relate to liquidity and the availability of cash, which reflects the essence of the cash flow statement in showing how liquid funds enter and leave the business.