In financial accounting, what is the primary purpose of a balance sheet?

• A. To report a company’s financial position at a specific point in time by listing assets, liabilities, and shareholders’ equity
• B. To report changes in shareholders’ equity over a period of time, including dividends and stock issuances
• C. To report a company’s revenues and expenses over a period of time to determine net income
• D. To report cash inflows and outflows over a period of time from operating, investing, and financing activities

Answer: (A)

Verified step by step guidance

1. Understand that the balance sheet is one of the primary financial statements used in accounting, alongside the income statement, statement of cash flows, and statement of changes in equity.
2. Recognize that the balance sheet provides a snapshot of a company's financial position at a specific point in time, unlike other statements that cover a period of time.
3. Identify the three main components of the balance sheet: assets, liabilities, and shareholders' equity, which together show what the company owns and owes, as well as the residual interest of the owners.
4. Recall the fundamental accounting equation that the balance sheet represents: \(\text{Assets} = \text{Liabilities} + \text{Shareholders' Equity}\), which must always be in balance.
5. Distinguish the balance sheet's purpose from other financial statements: it does not report revenues, expenses, or cash flows, but rather the financial position at a single date.