If you had to analyze a company's liquidity, which financial statement would be more suitable to use?

Analyzing a company's liquidity involves assessing its ability to meet short-term obligations and manage cash flow effectively. The cash flow statement is particularly suitable for this analysis because it provides detailed information about the cash inflows and outflows over a specific period.

The cash flow statement categorizes cash flows into operating, investing, and financing activities. By examining the operating cash flow, analysts can gauge how much cash the company generates from its core business operations. This figure is critical for understanding whether the company can cover its immediate liabilities without relying on external funding.

While the balance sheet also offers insight into liquidity through the current assets and current liabilities, it represents a snapshot at a specific point in time rather than showing the actual movement of cash. The income statement primarily focuses on revenues and expenses, which do not directly reflect cash availability, as it includes non-cash items like depreciation. The statement of shareholders' equity provides insights into equity changes but similarly lacks crucial details about cash flows.

Thus, the cash flow statement is the most suitable document for analyzing a company's liquidity, as it reveals the actual cash movements that directly affect a company's ability to fulfill its short-term financial obligations.