Certified Financial Management Specialist Practice Exam

In financial statements, what is a key indicator of liquidity?

1. Net operating cash flow

2. Accounts Receivable

3. Free Cash Flow

4. Cash Flow from Financing

The correct answer is: Net operating cash flow

In financial statements, a key indicator of liquidity is net operating cash flow. This metric reflects the cash that a company generates from its everyday business operations, providing insight into its ability to meet short-term liabilities. High net operating cash flow suggests that a business is generating sufficient cash to cover its operational expenses, making it more capable of handling unforeseen expenses or short-term obligations. While accounts receivable represents money owed to the company and can indicate potential cash flow, it does not directly reflect liquidity until those receivables are collected. Free cash flow measures the cash remaining after capital expenditures and shows the amount available to return to shareholders or reduce debt, yet it is more indicative of overall cash available rather than immediate liquidity. Cash flow from financing indicates cash transactions related to equity and debt financing, but it does not provide a clear view of how well a company can meet its short-term obligations. Thus, net operating cash flow stands out as the most direct measure of a company's liquidity position.