Chartered Financial Analyst (CFA) Level 1 Practice Exam 2025 - Free CFA Level 1 Practice Questions and Study Guide

The balance sheet is the financial statement primarily used to assess a company's liquidity because it provides a snapshot of the company's assets, liabilities, and equity at a specific point in time. Liquidity refers to the company's ability to meet its short-term obligations, and the balance sheet displays current assets and current liabilities.

Current assets are cash and other assets that are expected to be converted into cash within a year, such as accounts receivable and inventory. Current liabilities are obligations due within the same time frame, such as accounts payable and short-term debt. By comparing current assets to current liabilities, analysts can evaluate whether a company has sufficient resources to cover its short-term obligations, which is a crucial aspect of liquidity analysis.

While the cash flow statement is also important for understanding liquidity, as it shows the actual cash inflows and outflows over a period, it does not provide a static snapshot like the balance sheet does. The profit and loss statement (income statement) focuses primarily on operational performance over a specific period, and the statement of retained earnings details changes in earnings retained within the company, neither of which directly assess liquidity.