A business is solvent if:

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Prepare for the Farm Business Management Test. Revise with flashcards and multiple choice questions, each question accompanied by hints and explanations. Ace your exam!

Multiple Choice

A business is solvent if:

Explanation:
Solvency is about whether a business can meet its long-term obligations by having enough assets to cover its debts. On the balance sheet, when total assets exceed total liabilities, the company has positive net worth (assets minus liabilities is greater than zero), which means it’s solvent. If liabilities were greater than assets, net worth would be negative, signaling insolvency. Being solvent is not about how much profit you make in a year. Revenues exceeding expenses shows profitability, but a company can be profitable yet insolvent if its debts outweigh its assets, or solvent but not currently profitable.

Solvency is about whether a business can meet its long-term obligations by having enough assets to cover its debts. On the balance sheet, when total assets exceed total liabilities, the company has positive net worth (assets minus liabilities is greater than zero), which means it’s solvent.

If liabilities were greater than assets, net worth would be negative, signaling insolvency. Being solvent is not about how much profit you make in a year. Revenues exceeding expenses shows profitability, but a company can be profitable yet insolvent if its debts outweigh its assets, or solvent but not currently profitable.

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