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Which financial statement reflects a company's net worth at a specific point in time?
- a)Profit and loss statement.
- b)Cash flow statement.
- c)Balance sheet.
- d)Financial budget.
Correct answer is option 'C'. Can you explain this answer?
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Which financial statement reflects a company's net worth at a specific...
Understanding the Balance Sheet
The balance sheet is a key financial statement that provides a snapshot of a company's financial position at a specific point in time. It reflects the company's net worth, also known as equity.
Components of the Balance Sheet
- Assets: These are resources owned by the company, which can include cash, inventory, property, and equipment. Assets are classified into current (short-term) and non-current (long-term).
- Liabilities: These are obligations that the company owes to outside parties. Liabilities can also be classified as current (due within a year) and long-term (due after one year).
- Equity: This represents the residual interest in the assets of the company after deducting liabilities. It includes common stock, retained earnings, and other comprehensive income.
Net Worth Calculation
Net worth, or shareholder equity, is determined using the formula:
Net Worth = Total Assets - Total Liabilities
This formula underlines the essence of the balance sheet, as it provides a clear view of what the company owns versus what it owes.
Importance of the Balance Sheet
- Financial Health: The balance sheet helps stakeholders assess the financial health of a company. A strong balance sheet indicates good financial stability, whereas a weak one may signal potential issues.
- Investment Decisions: Investors and analysts use the balance sheet to make informed decisions regarding investing in a company.
In summary, the balance sheet is crucial for understanding a company’s net worth and overall financial condition at a specific point in time, making option 'C' the correct answer.
The balance sheet is a key financial statement that provides a snapshot of a company's financial position at a specific point in time. It reflects the company's net worth, also known as equity.
Components of the Balance Sheet
- Assets: These are resources owned by the company, which can include cash, inventory, property, and equipment. Assets are classified into current (short-term) and non-current (long-term).
- Liabilities: These are obligations that the company owes to outside parties. Liabilities can also be classified as current (due within a year) and long-term (due after one year).
- Equity: This represents the residual interest in the assets of the company after deducting liabilities. It includes common stock, retained earnings, and other comprehensive income.
Net Worth Calculation
Net worth, or shareholder equity, is determined using the formula:
Net Worth = Total Assets - Total Liabilities
This formula underlines the essence of the balance sheet, as it provides a clear view of what the company owns versus what it owes.
Importance of the Balance Sheet
- Financial Health: The balance sheet helps stakeholders assess the financial health of a company. A strong balance sheet indicates good financial stability, whereas a weak one may signal potential issues.
- Investment Decisions: Investors and analysts use the balance sheet to make informed decisions regarding investing in a company.
In summary, the balance sheet is crucial for understanding a company’s net worth and overall financial condition at a specific point in time, making option 'C' the correct answer.
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Which financial statement reflects a company's net worth at a specific...
The balance sheet reflects a company's net worth at a specific point in time. It provides an overview of a company's financial position by showing its assets, liabilities, and shareholders' equity at a particular date. It's a snapshot of the company's financial health and helps assess its overall value.
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