Which financial statement is most useful for understanding a company's cash flows?

The statement of cash flows is specifically designed to provide detailed insights into a company's cash inflows and outflows over a specific period. It separates cash activities into three main categories: operating, investing, and financing. This categorization helps stakeholders understand how cash is generated and used in the company's day-to-day operations, its investments in long-term assets, and financing activities.

While the income statement shows a company's profitability over a certain period by recording revenues and expenses, it does not account for cash flow movements. The balance sheet presents a snapshot of the company's financial position at a specific point in time but also lacks real-time cash flow details. The statement of retained earnings focuses on changes in equity and profits retained in the business, but it does not provide information about cash transactions.

Therefore, the statement of cash flows stands out as the most relevant financial statement for comprehensively understanding a company's cash flows, making it vital for assessing liquidity, financial management, and operational efficiency.