According to SFAC No. 5, what should a full set of financial statements contain?

• A. Income statement and tax report
• B. Statement of financial position and operating budget
• C. Statement of financial position, statement of earnings, and cash flow statement
• D. Only a balance sheet and income statement

Answer: (C)

A full set of financial statements, as outlined in the Statement of Financial Accounting Concepts No. 5 (SFAC No. 5), should include a statement of financial position, a statement of earnings, and a cash flow statement. This composition ensures that the financial statements provide a comprehensive overview of an entity’s financial performance and financial position.

The statement of financial position presents a snapshot of the company's assets, liabilities, and equity at a specific point in time, allowing users to assess the company's financial health. The statement of earnings, which reflects the company's revenues and expenses over a period, helps users evaluate the company's profitability. The cash flow statement provides insights into the company's liquidity and cash management by detailing the cash inflows and outflows.

In contrast, other options mentioned do not encompass the full range of necessary financial statements. For instance, an income statement paired with a tax report focuses primarily on profitability and tax liability without providing a complete picture of the company's financial status. Similarly, including a statement of financial position alongside an operating budget does not satisfy the requirements for financial reporting as the budget does not represent a snapshot of financial condition. Lastly, limiting the set to just a balance sheet and an income statement misses the critical aspect of cash flows, which are essential