CSLB Contractor's Law & Business Practice Exam

What is one of the key benefits of a cash flow statement in business?

1. It determines overall profit

2. It predicts future sales

3. It helps manage operational liquidity

4. It records tax liabilities

The correct answer is: It helps manage operational liquidity

A cash flow statement is vital for monitoring a business's operational liquidity, which refers to the availability of cash to meet short-term obligations. This statement provides insights into the actual inflows and outflows of cash during a specific period, allowing businesses to understand their financial health and how well they can manage day-to-day operations. By tracking cash transactions, business owners can determine if they have enough cash on hand to pay suppliers, employees, and other expenses as they come due. While determining overall profit is important, that is typically the focus of an income statement rather than a cash flow statement. Predicting future sales involves other analytical tools and does not directly relate to the cash flow statement's core purpose. Meanwhile, tax liabilities are recorded in the balance sheet and income statement, and while cash flow may indirectly affect tax payments, the cash flow statement itself does not primarily focus on tax liabilities. Therefore, the primary advantage of a cash flow statement is its role in effectively managing a business's liquidity.