Florida General Contractor Practice Exam

How can a construction company determine its net worth?

1. By adding total liabilities to assets

2. By subtracting total expenses from revenues

3. By subtracting total liabilities from total assets

4. By analyzing cash flow statements

The correct answer is: By subtracting total liabilities from total assets

Determining a construction company's net worth involves calculating the difference between its total assets and total liabilities. This is essential for assessing the financial health of the company. When total liabilities are subtracted from total assets, the resulting figure reflects the company’s net worth, also known as equity or owner's equity. This measure shows how much of the company is owned outright, providing insight into the value retained by the owners after settling all debts. The other methods have specific purposes but do not accurately represent net worth. Merely adding total liabilities to assets would yield a sizable figure without providing meaningful insight into worth or value ownership. Subtracting total expenses from revenues speaks to profitability over a period, which is different from net worth calculations. Analyzing cash flow statements focuses on the cash transactions within the company rather than determining overall financial standing at a point in time. Each method has its importance, but calculating net worth specifically requires the difference between total assets and total liabilities.