Certified Financial Management Specialist Practice Exam

How are assets and liabilities defined in financial terms?

1. Investments and revenues

2. Resources owned and obligations owed

3. Expenses incurred and income earned

4. Cash received and debts paid

The correct answer is: Resources owned and obligations owed

In financial terms, assets and liabilities are defined in a particular way that reflects their roles in a company's financial position. Assets are resources owned by the business, which can provide future economic benefits. This includes cash, accounts receivable, inventory, property, and equipment. On the other hand, liabilities represent obligations or debts that the business owes to external parties, such as loans, accounts payable, and other financial commitments. The correct definition captures this relationship: resources owned (assets) and obligations owed (liabilities) succinctly express the fundamental components of a company's balance sheet. This balance sheet represents the accounting equation, where assets equal liabilities plus equity. Having a clear understanding of this concept is essential for financial analysis, as it helps gauge the company's financial health and ability to meet its obligations. The other options, while involving financial terms, do not accurately address the definitions of assets and liabilities. For example, investments and revenues relate to income generation rather than the ownership of resources or the nature of obligations. Similarly, expenses incurred and income earned focus on operational performance rather than the balance sheet components. Cash received and debts paid pertain to cash flow activities rather than the broader definitions of assets and liabilities. Thus, understanding the precise definitions is crucial for effective financial management