Utah Contractor Practice Exam

Which document is essential in a contractor's financial record for assessing company liquidity?

1. Income statement

2. Cash-flow statement

3. Balance sheet

4. Expense report

The correct answer is: Balance sheet

The balance sheet is essential in a contractor's financial record for assessing company liquidity because it provides a snapshot of the company's financial situation at a specific point in time. It details the company's assets, liabilities, and equity, giving an overview of what the company owns versus what it owes. To assess liquidity specifically, one focuses on current assets and current liabilities found on the balance sheet. Current assets, such as cash and accounts receivable, are resources that can be quickly converted into cash, while current liabilities are obligations due within the year. The relationship between these two elements helps determine the company's ability to cover its short-term obligations, thus reflecting liquidity. While the income statement and cash-flow statement also provide valuable financial insights, they play different roles. The income statement outlines revenue and expenses over a period, reflecting profitability rather than liquidity. The cash-flow statement details cash movements in and out of the business, showing how money is generated and spent but does not provide a snapshot of the overall financial position at a specific time. The expense report details individual expenses but lacks a comprehensive view of a company's assets and liabilities. Thus, the balance sheet is the most critical document for assessing liquidity.