Which financial statement provides insights into a company's liquidity and solvency?

Which financial statement provides insights into a company's liquidity and solvency?

• A. Income statement
• B. Statement of cash flows
• C. Balance sheet
• D. Statement of retained earnings

Answer: (C)

The balance sheet is the financial statement that provides insights into a company's liquidity and solvency. It presents a snapshot of a company's financial position at a specific point in time, detailing its assets, liabilities, and equity. The balance sheet format allows users to evaluate the company's ability to meet its short-term obligations (liquidity) through the analysis of current assets and current liabilities. By comparing total assets to total liabilities, stakeholders can also assess the company's long-term solvency, ensuring that it has enough resources to cover its debts. In contrast, the income statement focuses on the company's revenues and expenses over a period of time, providing insights into profitability rather than liquidity or solvency. The statement of cash flows analyzes the inflows and outflows of cash over a specific period, giving information about cash management but not directly about overall financial position. The statement of retained earnings summarizes changes in equity during a period, primarily concerning profits kept in the business rather than the company's immediate financial health and obligations. Thus, the balance sheet stands out as the key statement for understanding liquidity and solvency.

The balance sheet is the financial statement that provides insights into a company's liquidity and solvency. It presents a snapshot of a company's financial position at a specific point in time, detailing its assets, liabilities, and equity. The balance sheet format allows users to evaluate the company's ability to meet its short-term obligations (liquidity) through the analysis of current assets and current liabilities. By comparing total assets to total liabilities, stakeholders can also assess the company's long-term solvency, ensuring that it has enough resources to cover its debts.

In contrast, the income statement focuses on the company's revenues and expenses over a period of time, providing insights into profitability rather than liquidity or solvency. The statement of cash flows analyzes the inflows and outflows of cash over a specific period, giving information about cash management but not directly about overall financial position. The statement of retained earnings summarizes changes in equity during a period, primarily concerning profits kept in the business rather than the company's immediate financial health and obligations. Thus, the balance sheet stands out as the key statement for understanding liquidity and solvency.