Certified Financial Management Specialist Practice Exam

What does liquidity measure in a company?

1. Long-term profitability

2. Ability to meet short-term obligations

3. Market share growth

4. Employee turnover rate

The correct answer is: Ability to meet short-term obligations

Liquidity refers to a company's ability to meet its short-term obligations and liabilities when they come due. This is essential for maintaining operational stability because it ensures that the company can cover its immediate expenses, such as paying suppliers, employees, and other debts. Liquidity is commonly assessed using ratios such as the current ratio and quick ratio, which compare current assets to current liabilities. In contrast, long-term profitability assesses the overall financial performance and potential earnings of a company over an extended period, which involves different metrics and is not directly tied to short-term cash flow needs. Market share growth focuses on a company's sales performance relative to competitors, reflecting competitive positioning rather than cash management. Employee turnover rate measures the rate at which employees leave and are replaced within an organization, which is pertinent to human resources and organizational culture rather than financial stability. Thus, the emphasis on short-term obligations is what distinctly defines liquidity, making it critically important for financial health and operational functionality.