Explain how the net effect of cash in each activity in the cash flow statement is used in evaluating liquidity, solvency, and financial flexibility. 

A statement of cash flows provides information about the cash that a company receives and pays out during a specific period of time, typically a quarter or a year. The statement of cash flows is divided into three sections: cash flow from operations, cash flow from investing, and cash flow from financing.

The net effect of cash in each activity in the cash flow statement is used to evaluate liquidity, solvency, and financial flexibility. Liquidity refers to a company’s ability to meet its short-term financial obligations, such as paying off its bills or loans. The cash flow from operations section shows how much cash a company generates from its day-to-day operations, such as selling goods and services. A positive cash flow from operations indicates that a company is generating enough cash to pay its bills and maintain its liquidity.

Solvency refers to a company’s ability to meet its long-term financial obligations, such as paying off loans or financing growth. The cash flow from investing section shows how much cash a company is using to invest in long-term assets, such as equipment or property. A positive cash flow from investing indicates that a company is generating enough cash to invest in its future growth.

Financial flexibility refers to a company’s ability to raise cash to meet its financial obligations if needed. The cash flow from financing section shows how much cash a company is generating or using from borrowing and repaying loans. A positive cash flow from financing indicates that a company has access to funding if needed.

In order to get a full understanding of a company’s financial health, it is important to look at the cash flow statement as a whole, in order to identify the net effect of cash in each activity, combined with net cash. It helps to gain a comprehensive insight on the company’s financial stability, including how much cash is available to pay bills, invest in growth, and access to funding.