Insolvent occurs when which statement is true?

Insolvent occurs when which statement is true?

• A. Total liabilities exceed assets.
• B. Total assets exceed liabilities.
• C. Cash flow is negative.
• D. Net worth is zero.

Answer: (A)

Insolvency means what you owe is more than what you own. When total liabilities exceed assets, you have negative net worth, which means you can’t cover all debts with the assets on hand. That condition is what defines insolvency, so the statement that liabilities exceed assets is true. Having assets exceed liabilities shows solvency, not insolvency. A negative cash flow describes a liquidity issue over time, not necessarily insolvency. Net worth of zero means assets equal liabilities, which is not insolvency because there’s no shortfall to cover debts.

Insolvency means what you owe is more than what you own. When total liabilities exceed assets, you have negative net worth, which means you can’t cover all debts with the assets on hand. That condition is what defines insolvency, so the statement that liabilities exceed assets is true. Having assets exceed liabilities shows solvency, not insolvency. A negative cash flow describes a liquidity issue over time, not necessarily insolvency. Net worth of zero means assets equal liabilities, which is not insolvency because there’s no shortfall to cover debts.