- CFA Exams
- 2021 CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 22. Understanding Balance Sheets
- Subject 5. Uses and Analysis of the Balance Sheet
CFA Practice Question
Liquidity refers to a firm's short-term ability to generate cash for working capital needs and immediate debt repayment needs. True or False?
Correct Answer: True
This is the definition of liquidity. Solvency refers to a firm's ability to generate a stream of cash flows sufficient to maintain its productive capacity and still meet principal and interest payments on debt in the long run.
User Contributed Comments 1
| User | Comment |
|---|---|
| viviann | Liquidity refers to a firm's short-term ability to generate cash for working capital needs and immediate debt repayment needs; Solvency refers to a firm's ability to generate a stream of cash flows sufficient to maintain its productive capacity and still meet principal and interest payments on debt in the long run. |