What is the relationship between the balance sheet and the statement of cash flow?

The statement of cash flow plays a crucial role in clarifying the changes in cash amounts as presented on the balance sheet. This statement provides a detailed account of cash inflows and outflows over a specific period, categorizing these movements into operating, investing, and financing activities. By doing so, it helps stakeholders understand how cash is generated or used during the period and reconciles the changes in cash balances that are reported on the balance sheet at the beginning and end of that period.

The balance sheet, on the other hand, captures a snapshot of the company's financial position at a certain point in time, listing assets, liabilities, and equity. The relationship between these two documents is essential for users of financial statements, as the statement of cash flow explains the variations in cash that are reflected in the balance sheet. Thus, recognizing this connection is vital for a comprehensive understanding of a company's liquidity and cash management.

In contrast, the other options do not accurately define this relationship and can lead to misunderstandings about how the balance sheet and cash flow statement function in the financial reporting context.