Final answer:
The statement of cash flows explains changes in a firm's Cash and cash equivalents, providing a comprehensive overview of cash inflows and outflows from operating, investing, and financing activities.
Step-by-step explanation:
The statement of cash flows explains changes in a firm's Cash and cash equivalents. It is a financial report that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period. Cash and cash equivalents include coins, currency, and liquid instruments like treasury bills and money market funds. The statement divides these cash flows into three sections: operating activities, investing activities, and financing activities.
For example, if a bank increases its loans made to customers by $5 million during the year, the statement of cash flows would show this as a cash outflow in the investing activities section, assuming the money comes directly from the bank's reserves. Similarly, if the bank receives a total of $3 million in loan repayments, this would be noted as a cash inflow.
However, changes in working capital, accounts receivable, and long-term assets and liabilities are not covered exclusively by the statement of cash flows, though they can affect cash positions indirectly.