Federal Nursing Home Administrator Practice Exam

In which scenario would an organization most likely report a solvency issue?

1. When it cannot find new customers

2. When it is unable to meet long-term fixed expenses

3. When its inventory levels are too high

4. When cash flow is high

The correct answer is: When it is unable to meet long-term fixed expenses

A solvency issue refers to an organization's ability to meet its long-term financial obligations and manage its fixed expenses without facing the risk of bankruptcy. The scenario where an organization is unable to meet long-term fixed expenses directly indicates a problem with its solvency. Fixed expenses typically include costs such as long-term debt repayments, lease obligations, and other non-variable costs that the organization must pay regardless of its revenue levels. While finding new customers is important for growth and revenue generation, it does not directly indicate solvency. High inventory levels can signify cash flow problems or operational inefficiencies, but they do not alone define an inability to meet long-term obligations. Similarly, high cash flow indicates strong liquidity, which generally suggests that the organization is in a healthy financial position. Thus, the correct scenario that aligns with a solvency issue is described by the inability to meet long-term fixed expenses, highlighting a significant risk to the organization’s ongoing financial stability and viability.