Which statement about the cash flow statement is correct?

• A. It uses information from both the income statement and the balance sheet
• B. It uses only the income statement
• C. It uses only the balance sheet
• D. It is not related to the other statements

Answer: (C)

The cash flow statement ties together the income statement and the balance sheet by showing how profits become cash and how changes in assets, liabilities, and other items affect cash. It starts with net income from the income statement, then adds back non-cash expenses (like depreciation), subtracts gains or adds losses that affected net income, and adjusts for changes in working capital and other balance sheet accounts to derive cash from operating activities. It also reports cash flows from investing and financing activities, which reflect actual cash movements related to long-term assets and financing transactions that come from balance sheet changes. Because it relies on both the income statement (for earnings and non-cash adjustments) and the balance sheet (for changes in assets and liabilities), this statement is inherently connected to and derived from those other statements. The options suggesting it comes from only one statement or is unrelated don’t fit how the cash flow statement captures cash effects of the reported numbers.