2 - Intermediate Accounting (Kieso)

Question

What is meant by solvency? What information in the balance sheet can be used to assess a company’s solvency?

Step-by-Step Solution

Answer

Solvency reflects the ability to repay the borrowed money. It can be determined using the liabilities and the assets classified as current in nature.

Definition of Account payable

Account payable can be defined as the account reporting the amount due to the creditors regarding the credit purchases made by the business entity.

Meaning of Solvency

Solvency is the measure of the ability of the company to repay the short-term debts as they become due. Short-term debts generally become due with the operating cycle or one year.

Information used for determining the solvency of the business

The solvency of the business entity is determined using the current assets and current liabilities reported on the balance sheet. Financial ratios such as current ratio and quick ratio are used.