What does a cash flow analysis reveal about income and expenses?

A cash flow analysis primarily focuses on the inflow and outflow of cash within a specific timeframe, typically highlighting the various sources of income and the corresponding expenses. The correct answer indicates that a cash flow analysis shows that income and expenses are balanced, which is crucial in determining an individual or organization's financial health.

When income and expenses are balanced, it means that the cash inflows are equal to the cash outflows, allowing for a sustainable financial situation. This balance is essential for effective financial planning and helps in identifying areas where spending may need to be adjusted or where income can be increased to maintain equilibrium.

While cash flow analysis can provide insights into total revenue and profit margins, indicate future income potential, or outline investment opportunities, these aspects are not its primary function. Instead, the analysis serves as a tool to ensure that an entity can manage its cash effectively, supporting day-to-day operations and long-term financial stability.