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ACCA Applied Knowledge · Financial Accounting · The context and purpose of financial statements for external reporting

Which of the following is a reason why the statement of financial position, rather than the statement of profit or loss, is mainly used to assess an entity's liquidity and financial flexibility?

The statement of financial position shows an entity's assets, liabilities and equity at a specific date. This lets users judge liquidity, solvency and financial flexibility. The statement of profit or loss covers performance over a period, so it is less suited to this purpose.

  1. AIt reports the entity's resources and claims against them at a point in timeCorrect
  2. BIt reports income and expenses over a period
  3. CIt lists all cash payments made to shareholders during the year
  4. DIt reconciles opening and closing retained earnings only

Explanation

The statement of financial position presents assets, liabilities and equity at a date, so users can assess liquidity, solvency and funding structure. The statement of profit or loss shows performance over a period, so it does not directly show resources and claims at a date.

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