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Business Strategy and Accounting Basics

Among a company's financial statements, which correctly describes the balance sheet?

  1. AIt compares revenues and expenses over a period (the accounting period) to show the profit for that period
  2. BIt shows the increase or decrease in cash over a period, divided into operating, investing and financing activities
  3. CIt shows the assets, liabilities and net assets at a point in time (such as the end of the period), and total assets equal the sum of liabilities and net assets
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Answer: C. It shows the assets, liabilities and net assets at a point in time (such as the end of the period), and total assets equal the sum of liabilities and net assets

The balance sheet (B/S) is the financial statement that shows, at a point in time such as the end of the period, what assets a company holds and how it raised the funds for them through liabilities and net assets. Assets are listed on the left and liabilities and net assets on the right, and because the two sides always total the same, it is called a balance sheet. The profit for a period is shown by the income statement (P/L), and the change in cash by the cash flow statement.

  • A. This describes the income statement (P/L). It subtracts expenses from sales step by step to show gross profit, operating profit, ordinary profit and so on.
  • B. This describes the cash flow statement. A company can run short of cash even while making a profit, so the flow of cash is shown separately.
  • C. Correct. Assets = liabilities + net assets holds.
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