If you could only look at two statements to assess a company's prospects, which two would you use?

• A. Income Statement and Balance Sheet
• B. Income Statement and Cash Flow Statement
• C. Balance Sheet and Cash Flow Statement
• D. Statement of Shareholders' Equity and Income Statement

Answer: (A)

You're evaluating earnings power together with financial position. The income statement shows profitability—revenues, costs, margins, and net income—so you can judge whether the company is actually generating earnings and how efficiently it operates. The balance sheet provides a snapshot of what the company owns and owes at a point in time, revealing its asset base, liquidity, and how it is financed (debt and equity). Together, these two views let you assess whether the company can sustain profits relative to its assets and whether it has the financial flexibility to weather ups and downs.

The cash flow statement is valuable, but when limited to two statements, you gain a clearer, more direct sense of earnings power and financial strength by pairing the income statement with the balance sheet. If profits look solid and the balance sheet shows a healthy asset base with manageable liabilities and good liquidity, prospects tend to be favorable. If profits are weak or shrinking while leverage or liquidity deteriorates, prospects are more concerning.