Which statement about cash flow forecasting is true?

• A. It projects cash inflows and outflows and helps determine funding needs.
• B. It tracks only accounts payable.
• C. It replaces the income statement.
• D. It measures profitability.

Answer: (D)

Cash flow forecasting focuses on liquidity—the timing and amount of cash coming in and going out. By outlining expected cash receipts and payments, it shows whether the business will have enough cash on hand to meet obligations and whether financing will be needed or if there will be excess cash to invest. It does not measure profitability; that’s determined by the income statement, which tracks revenues minus expenses to show net income. It also isn’t limited to accounts payable; it includes all cash movements—receivables collections, supplier payments, payroll, taxes, financing activities, and more. So the forecast helps with funding decisions and cash planning, while profitability is a separate concept shown in the income statement.