Certified Government Financial Manager (CGFM) 2025 – 400 Free Practice Questions to Pass the Exam

The primary purpose of conducting liquidity ratio analysis is to determine an organization's ability to meet creditor demands. Liquidity ratios, such as the current ratio and quick ratio, provide insight into a company's short-term financial health by measuring its capacity to cover its short-term obligations with its most liquid assets. This analysis is crucial for creditors and investors who want to assess the risk associated with lending money or extending credit to an organization.

By focusing on the relationship between current assets and current liabilities, liquidity ratio analysis helps stakeholders understand whether the organization has sufficient resources readily available to respond to financial liabilities when they arise. This is especially important in government financial management, where the ability to meet these obligations can affect service delivery and restore public confidence.

The other options, while relevant to financial analysis, do not directly address the specific intent of liquidity ratios. For instance, assessing long-term profitability focuses more on return on investment and operational efficiency rather than immediate liquidity. Evaluating cash flow management encompasses a broader analysis of operational inflows and outflows rather than just the relationship between current assets and liabilities. Analyzing historical financial performance considers trends over time but does not specifically assess current liquidity position and creditor obligations.