Auctioneer Practice Exam

Which financial statement would you use to assess whether a business is financially healthy?

1. Income statement

2. Cash flow statement

3. Balance sheet

4. Statement of changes in equity

The correct answer is: Balance sheet

The balance sheet is essential for assessing a business's financial health because it provides a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time. This financial statement allows you to evaluate the company's overall financial position and its ability to meet obligations. By examining the balance sheet, you gain insight into the company’s liquidity, solvency, and overall stability. For instance, a comparison of total assets against total liabilities indicates whether the business is likely to meet its obligations. The equity portion reveals how much of the business is owned outright by shareholders versus what is owed, which is crucial for understanding long-term financial health. While the income statement focuses on profitability over a period, and the cash flow statement highlights how cash is generated and utilized, the balance sheet provides a comprehensive overview of the financial condition, making it the most vital statement for evaluating long-term health. The statement of changes in equity offers additional details about the movements in equity but does not provide the complete picture of financial health that the balance sheet does.