Indicate if the below statement is True or False, and then explain why it is True or False. For the other statements, select the correct answer.

1. Liquidity refers to the ability of a company to use its financial resources to adapt to change.
2. Historical cost is used extensively as a valuation method because it is based on transactions and provides information that has a high degree of relevance.
3. The purpose of the balance sheet is to help external users evaluate the company's:
   1. liquidity, financial flexibility, operating capability, and financing activities.
   2. liquidity, financial flexibility, operating capability, financing activities, and investing activities.
   3. liquidity, financing activities, income- producing performance, and investing activities.
   4. liquidity, financial flexibility, operating capability, and income-producing performance.
4. If a company sells 1,000 shares of $5 par value common stock for $15 a share, the result of this sale will appear on the company's balance sheet as a:
   1. (a) $15,000 increase in the Common Stock account.
   2. (b) $5,000 increase in the Common Stock account and a $10,000 increase in the Additional Paid-in Capital account.
   3. (c) $5,000 increase in the Common Stock account and a $10,000 increase in the Retained Earnings account.
   4. (d) $5,000 increase in the Common Stock account and a $10,000 increase in an item of other comprehensive income.
5. The ability of a company to generate sufficient net cash inflows to adapt to change is the measure of its:
   1. liquidity.
   2. financial flexibility.
   3. solvency.
   4. retained earnings.