Entrepreneurship and Small Business (ESB) V2 Certification Practice Exam

What financial statement shows what a company owns (both assets and liabilities)?

1. Balance Sheet

2. Income Statement

3. Cash Flow Statement

4. Statement of Shareholders' Equity

The correct answer is: Balance Sheet

The balance sheet is the financial statement that provides a snapshot of a company's financial position at a specific point in time, detailing what the company owns and what it owes. It summarizes the company’s assets, which are the resources that the business owns or controls, as well as liabilities, which represent the obligations owed to external parties. Assets are typically categorized into current assets (like cash and inventory) and non-current assets (like property and equipment). Liabilities are also divided into current liabilities (due within one year) and long-term liabilities (due in more than one year). The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity, ensuring that the company’s total resources are funded either through debt or equity. In contrast, the income statement focuses on the company's revenues and expenses over a period of time, reflecting its profitability. The cash flow statement documents the inflows and outflows of cash, providing insights into how a company manages its cash. The statement of shareholders' equity details changes in equity, including retained earnings and other equity-related transactions, but does not summarize assets and liabilities in the same comprehensive manner as the balance sheet. Thus, the balance sheet is the key statement for understanding a company’s ownership structure and