International Association of Accessibility Professionals (IAAP) Certified Administrative Professional (CAP) Practice Exam

What does liquidity refer to in a financial context?

1. The amount of cash available on hand

2. The efficiency of inventory turnover

3. The ability to meet short-term obligations

4. The overall net worth of a company

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

Liquidity in a financial context is primarily concerned with a company's ability to meet its short-term obligations. This means if a company has sufficient liquid assets, it can easily convert these assets into cash to pay off liabilities that are due soon, such as accounts payable, short-term loans, or other operational expenses. While cash available on hand plays a part in liquidity, it’s more comprehensive to address liquidity as the broader capacity to access cash and liquid assets to fulfill short-term financial commitments. Metrics like the current ratio or quick ratio are often used to assess liquidity by measuring the relationship between current assets and current liabilities. The other options focus on different financial aspects: cash availability, inventory efficiency, and net worth assess different dimensions of a company's financial health but do not define liquidity directly. Liquidity emphasizes the immediacy and readiness to cover immediate financial responsibilities, making it a crucial aspect of financial management for any business.