CFA Practice Question

There are 86 practice questions for this study session.

CFA Practice Question

Which financial statement would be most useful to an analyst who wants to evaluate a company's liquidity position and financial flexibility?
A. Statement of cash flows
B. Income statement
C. Balance sheet
Explanation: Liquidity relates to how easily a firm can convert assets into cash in relation to those short-term liabilities that need to be paid. Financial flexibility relates to a firm's ability to handle unforeseen downturns in its business environment or take advantage of investment opportunities. As such, it makes the most sense that the balance sheet would be the primary financial statement used to evaluate a company's liquidity and financial flexibility. It may not, however, provide a clear picture of liquidity unless it is used in combination with the cash flow statement.

User Contributed Comments 6

User Comment
kalps This should have been obvious as all the ratio calculated are from the balance i.e. CA/QR/ROCE
cong the problem with using Cash flow statement to evaluate the liquidity position of the company that it only measures the change of accounts over a period instead of identifying the positions of accounts at one point of time (For example, it does not tell you how much cash the company holds at the end of a year.)
mickykumar I agree with cong
GinG I love how analyst notes for study session 7 broke down the CASH FLOW statement as the statement used to help evaluate liquidity, solvency, and financial flexibility...Thanks for the mind games AN..
J0rdanl ^ I fell for the same thing... I thought this was an easy question at first...
I knew u could us the BS for ratios but the notes made it sound like the CF statement was the one for liquidity and so on...
sm200 @ cong, Cashflows tell you how much cash is held at the start and end of the financial year but its correct that cashflow shows the change in accounts as in cash inflow or outflow
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