Entrepreneurship and Small Business (ESB) Certification Practice Exam

Which financial report outlines a company's assets, liabilities, and equity over a specific period?

1. Income statement

2. Cash flow statement

3. Balance sheet

4. Statement of changes in equity

The correct answer is: Balance sheet

The financial report that outlines a company's assets, liabilities, and equity at a specific point in time is the balance sheet. This document provides a snapshot of what a company owns (assets), what it owes (liabilities), and the residual interest of the owners (equity) at the close of the reporting period. The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Equity. This relationship ensures that all resources owned by the company are financed either through borrowing or by the owners’ investments. The income statement, on the other hand, details the company's revenues and expenses over a period, showing the profitability of the business rather than its financial position at a specific time. The cash flow statement records the inflow and outflow of cash, highlighting how cash is generated and used within a business, but does not summarize assets and liabilities. The statement of changes in equity provides insight into changes in the equity section of the balance sheet over a period but does not encompass the full picture of assets and liabilities. Understanding the balance sheet is critical for stakeholders as it helps assess the company’s financial health, liquidity, and capital structure, making it an essential tool for financial analysis and decision-making.