The Main Purpose of the Statement of Financial Position

C

The Statement of Financial position or balance sheet presents 3 major elements: assets (items of value), liabilities (debts)), and shareholders' equity (net worth).

The main purpose of the statement of financial position, also known as the balance sheet, is to reflect the financial position of a company at a specific point in time. It provides a snapshot of the company's assets, liabilities, and shareholders' equity.

Answer C, "items of value, debts, and net worth," is the most accurate description of the statement of financial position. Let's break down each component:

1. Items of Value: The statement of financial position lists the company's assets, which represent the economic resources controlled by the company. Assets can include tangible items such as cash, inventory, property, plant, and equipment, as well as intangible assets such as patents or trademarks. These assets represent what the company owns and can use to generate future economic benefits.

2. Debts: The statement of financial position also includes the company's liabilities, which are its obligations or debts to external parties. Liabilities can include loans, accounts payable, accrued expenses, or long-term debt. These represent what the company owes to others and must be repaid over time.

3. Net Worth: Net worth, also known as shareholders' equity or owner's equity, represents the residual interest in the assets of the company after deducting its liabilities. It is the portion of the company's value that belongs to its shareholders. Net worth is calculated by subtracting total liabilities from total assets. It reflects the shareholders' investment in the company and any accumulated profits or losses.

The statement of financial position does not reflect the market value of the firm's assets at a specific point in time (Answer A), as it typically presents assets at historical cost or fair value, depending on the accounting framework used.

It also does not specifically focus on the status of the firm's assets in case of forced liquidation (Answer B), although the balance sheet provides information about the company's assets that could be used to meet its obligations in case of liquidation.

Answer E, "the firm's potential for growth in stock values in the stock market," is not the primary purpose of the statement of financial position. While the balance sheet provides information about the company's financial position, it does not directly reflect the firm's potential for growth in stock values. That information is more commonly found in financial statements like the income statement or cash flow statement.

Therefore, the most accurate answer is C, "items of value, debts, and net worth," as it encompasses the main elements reflected in the statement of financial position.