Bookkeeping Basics Practice Test

The key idea here is that cash flow is all about actual cash movements during a period, categorized into operating activities, investing activities, and financing activities. The statement of cash flows is the one that aggregates the cash inflows and outflows in those areas, showing how much cash came from operating activities (like cash received from customers and cash paid to suppliers) and from investing activities (such as purchases or sales of long-term assets). It also accounts for financing activities, and it reconciles the beginning and ending cash balance.

The other statements don’t focus on cash movements. The balance sheet shows what the company owns and owes at a specific moment—its assets, liabilities, and equity—without detailing cash receipts and payments. The income statement reports profitability over a period, based on accrual accounting, so it includes revenues and expenses and may include non-cash items like depreciation. The statement of equity tracks changes in owners’ equity, not cash flow.