Which of the following best helps entrepreneurs assess the viability of a company for generating profits before making an investment?

• A. Relying solely on market rumors
• B. Analyzing the company's financial statements
• C. Focusing only on the company's marketing materials
• D. Ignoring industry trends

Answer: (B)

Verified step by step guidance

1. Understand the purpose of financial statements: Financial statements provide a detailed overview of a company's financial health, including its revenues, expenses, assets, liabilities, and equity. They are essential tools for assessing profitability and viability.
2. Identify the key components of financial statements: Entrepreneurs should focus on the income statement (to evaluate profitability), the balance sheet (to assess financial stability), and the cash flow statement (to understand liquidity and cash management).
3. Analyze the income statement: Review the company's revenues, cost of goods sold, operating expenses, and net income to determine if the company is generating profits and how sustainable those profits are.
4. Examine the balance sheet: Assess the company's assets, liabilities, and equity to understand its financial position and whether it has the resources to sustain operations and growth.
5. Evaluate the cash flow statement: Analyze cash inflows and outflows to ensure the company has sufficient liquidity to meet its obligations and invest in future growth. This helps entrepreneurs gauge the company's ability to generate cash effectively.