Louisiana Contractors License Practice Exam

Which financial document provides a snapshot of a company's assets and liabilities at a specific point in time?

1. Income statement

2. Cash flow statement

3. Balance sheet

4. Statement of retained earnings

The correct answer is: Balance sheet

The balance sheet is the financial document that provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. It is a critical tool for understanding the financial position of a business, showing what the company owns (assets), what it owes (liabilities), and the residual interest of the owners (equity). This document is structured in a way that the total assets are equal to the sum of total liabilities and owner's equity, reflecting the basic accounting equation: Assets = Liabilities + Equity. This equation demonstrates how the company's resources are financed, either through debt (liabilities) or owner investment (equity). In contrast, while the income statement reveals a company's profitability over a certain period by detailing revenues and expenses, it does not provide a current snapshot of what the company owns or owes. The cash flow statement focuses on the inflows and outflows of cash, providing insights into liquidity rather than the overall asset and liability picture. The statement of retained earnings shows changes in the equity section related to retained profits but does not encapsulate the entire financial status of the company at a given moment. Therefore, the balance sheet is the definitive document for conveying a company's financial condition at a given snapshot in time.