Chartered Financial Analyst (CFA) Level 1 Practice Exam

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What is the primary focus of liquidity ratios compared to solvency ratios?

Short-term vs. long-term financial health
Total debt vs. total equity
Operational vs. management efficiency
Revenue generation vs. cost management

The correct answer is: Short-term vs. long-term financial health

The primary focus of liquidity ratios compared to solvency ratios is indeed on the distinction between short-term and long-term financial health. Liquidity ratios are designed to assess a company's ability to meet its short-term obligations, showing how effectively current assets can cover current liabilities. Key examples of liquidity ratios include the current ratio and the quick ratio. On the other hand, solvency ratios focus on a company's long-term financial stability and ability to meet long-term debt obligations. These ratios evaluate the overall debt levels relative to equity and total assets, helping investors understand the company's long-term solvency and risk profile. Thus, the correct answer highlights the different time frames these ratios address, making it essential to understand both for a comprehensive view of financial health.