Florida General Contractor Practice Exam

What does the term net worth refer to?

1. Income minus expenses

2. Total assets minus total liabilities

3. Annual revenue

4. Capital gains on investments

The correct answer is: Total assets minus total liabilities

The term net worth is defined as the total value of an individual's or a business's assets after all liabilities have been subtracted. This means that net worth provides a snapshot of financial health, revealing what is owned (assets) versus what is owed (liabilities) at a specific point in time. For instance, if a contractor has assets such as cash, equipment, and property valued at $500,000 and owes $200,000 in loans and liabilities, the net worth would be calculated as $500,000 (assets) minus $200,000 (liabilities), resulting in a net worth of $300,000. This concept is crucial for contractors and businesses as it helps assess financial stability, which can impact decisions related to credit, investments, and overall financial planning. In contrast, terms like income minus expenses refers to profit or loss over a period, annual revenue represents total earnings without accounting for costs, and capital gains focus specifically on the profits made from the sale of assets rather than an overall financial picture.