What is the primary financial statement used to assess an organization’s liquidity?

The primary financial statement used to assess an organization’s liquidity is indeed the balance sheet. The balance sheet provides a snapshot of an organization’s financial position at a specific point in time, detailing what the organization owns (assets) and what it owes (liabilities). Liquidity refers to the ability of the organization to meet its short-term obligations, and the balance sheet's current assets and current liabilities categories play a crucial role in this assessment.

Current assets, such as cash, accounts receivable, and inventory, represent resources that the organization can quickly convert into cash to pay off debts. Current liabilities reflect the organization’s short-term financial obligations. By comparing these two sections, stakeholders can evaluate the organization’s liquidity position, often using ratios such as the current ratio or quick ratio. This focus on current resources versus current obligations makes the balance sheet fundamental for assessing liquidity.

The other financial statements, while important for various analyses, do not primarily focus on liquidity in the same direct way. The income statement measures profitability over a period, the statement of cash flows tracks cash inflows and outflows, but is more focused on cash management and operations than on the liquidity snapshot at a specific time, and the statement of changes in equity outlines movements in shareholder equity but does