Which statement about liquidity and solvency is accurate?

Which statement about liquidity and solvency is accurate?

• A. Liquidity is the ability to meet long-term obligations; solvency is the ability to meet short-term obligations.
• B. Liquidity measures total assets and liabilities; solvency measures cash flow.
• C. Liquidity is the measure of profitability; solvency is the measure of debt load.
• D. Liquidity is the ability to meet short-term obligations; solvency is the ability to meet long-term obligations.

Answer: (D)

Liquidity and solvency describe different timing of obligations: liquidity is the ability to meet short-term obligations with assets that can quickly be turned into cash, while solvency is the ability to meet long-term obligations and remain financially viable over time. This makes the correct statement clear: you’re assessing how easily a business can cover near-term bills like payroll and supplier invoices, versus whether it can sustain operations and pay debts over the long run. Tools for liquidity include current and quick ratios that compare near-cash assets to current liabilities, focusing on the immediate cash runway. For solvency, the focus is on long-term financial structure and endurance, using measures like debt levels, interest coverage, and capital adequacy to judge whether the business can support its obligations in the future. The other options mix up timing or what is being measured—one wrongly assigns long-term focus to liquidity, another confuses liquidity with overall asset or cash-flow measures, and another ties solvency too narrowly to debt load or links profitability to liquidity.

Liquidity and solvency describe different timing of obligations: liquidity is the ability to meet short-term obligations with assets that can quickly be turned into cash, while solvency is the ability to meet long-term obligations and remain financially viable over time. This makes the correct statement clear: you’re assessing how easily a business can cover near-term bills like payroll and supplier invoices, versus whether it can sustain operations and pay debts over the long run. Tools for liquidity include current and quick ratios that compare near-cash assets to current liabilities, focusing on the immediate cash runway. For solvency, the focus is on long-term financial structure and endurance, using measures like debt levels, interest coverage, and capital adequacy to judge whether the business can support its obligations in the future. The other options mix up timing or what is being measured—one wrongly assigns long-term focus to liquidity, another confuses liquidity with overall asset or cash-flow measures, and another ties solvency too narrowly to debt load or links profitability to liquidity.