Which financial statement is primarily used to evaluate a company's liquidity?

The balance sheet is primarily used to evaluate a company's liquidity because it provides a snapshot of a company's financial position at a specific point in time. It lists the company’s assets, liabilities, and equity, allowing stakeholders to assess the short-term and long-term financial health.

Liquidity specifically refers to the ability of a company to meet its short-term obligations, and the balance sheet facilitates this analysis through the presentation of current assets and current liabilities. Current assets are assets that can be converted into cash within one year, while current liabilities are obligations due to be settled within the same timeframe. By comparing current assets to current liabilities, analysts can derive key liquidity ratios, such as the current ratio and quick ratio, which indicate how well a company can cover its short-term debts.

In contrast, the income statement focuses on a company’s profitability over a period of time rather than its financial position at a point in time. The cash flow statement provides insights into cash generated and spent over a period but does not present a clear picture of assets and liabilities at once, making it less direct for liquidity assessment. Finally, the statement of changes in equity details changes in equity components during an accounting period, which is useful for understanding shareholders' equity but does not focus on liquidity.