Question

The financial statement that reports assets, liabilities, and owner's equity is the: a. income statement. b. owner's equity statement. c. balance sheet. d. statement of cash flows.

Short answer

The correct answer is c: balance sheet.

Step-by-step solution

Understand Financial Statements

Financial statements are reports that summarize the financial performance and position of a company. There are four primary types: the income statement, the balance sheet, the statement of changes in owner's equity, and the statement of cash flows. Each serves a specific purpose in financial reporting.

Define the Balance Sheet

The balance sheet provides a snapshot of a company's financial position at a specific point in time. It reports on the company's assets, liabilities, and owner's equity, reflecting what the company owns, owes, and the owner's interest in the company.

Identify Characteristics of Other Options

- The **income statement** reports on a company's financial performance over a period of time, specifically the revenues and expenses. - The **owner's equity statement** shows changes in the owner's equity during a specific time period. - The **statement of cash flows** provides an overview of the cash inflows and outflows during a given period.

Choose the Correct Statement

Given these definitions and characteristics, the financial statement that reports assets, liabilities, and owner's equity is the balance sheet. Options a, b, and d do not include all three components in their reporting focus.

Key concepts

Financial Statements

Financial statements are essential tools for understanding a company's financial health. These are systematic records that provide insights into a company's financial conditions and activities during a specific period. There are four key types of financial statements, each serving a unique role:

• Income Statement: This statement shows how much money the company earned and spent over a period. It focuses on revenues, expenses, and profits or losses.
• Balance Sheet: Offers a snapshot of the company's financial standing at a particular moment, detailing assets, liabilities, and owner's equity.
• Statement of Changes in Owner's Equity: This reports how the equity (assets minus liabilities) of the company changes over time, often due to profits, losses, or withdrawals by the owners.
• Statement of Cash Flows: Focuses on the movement of cash within the company—where it comes from and how it's spent.

Each type of statement encapsulates different aspects of a company's financial story, providing a comprehensive overview when analyzed together.

Assets

Assets are valuable resources owned by a company, expected to provide future economic benefits. They are the "good things" a business owns and uses to generate profits. Assets can significantly vary by nature and include:

• Current Assets: These are assets expected to be converted into cash or consumed within one financial year, such as cash, accounts receivable, and inventory.
• Non-current Assets: These are long-term investments or physical items not expected to be liquidated within a year, like machinery, buildings, or patents.

The value and composition of a company's assets are typically reported on the balance sheet, helping stakeholders understand what the company owns and how efficiently resources are utilized for growth.

Liabilities

Liabilities are obligations that a company owes to outside parties, representing what the company is bound to pay back. They are the "claims" on a company's assets by creditors and thus reflect what the business owes. Liabilities can generally be classified as:

• Current Liabilities: These are debts or obligations due to be settled within one year, such as accounts payable, short-term loans, and other payables.
• Non-current Liabilities: Long-term debts and obligations that are not due within the next 12 months, including bonds payable, long-term leases, and long-term loans.

Understanding liabilities is crucial for assessing a company's financial health, as excessive liabilities may indicate potential financial risks and the need for better debt management.

Owner's Equity

Owner's equity, often synonymous with net worth, is the residual interest in the assets of the entity after deducting liabilities. It represents what the owners truly "own" after all obligations have been met. Here are some components of owner's equity:

• Contributed Capital: This consists of the capital that shareholders or owners have invested in the company. It includes common and preferred stock.
• Retained Earnings: These are the accumulated profits that have been reinvested in the business instead of being distributed as dividends.
• Additional Paid-in Capital: The amount over the par value that investors pay for shares.

Owner's equity is a vital part of the balance sheet, representing the owner's portion of the company assets. It provides insights into how well the company is utilizing retained earnings and capital contributions.