When is a firm insolvent from an accounting perspective?
A)when the market value of the firm's equity equals zero
B)when the firm's revenues cease
C)when the firm's debt exceeds the value of the firm's equity
D)when the firm has a negative net worth
E)when the firm is unable to meet its financial obligations in a timely manner

Question

Quizplus · Accepted Answer

Insolvency from an accounting perspective means that the firm's liabilities exceed its assets or the firm has a negative net worth. Therefore, option D, when the firm has a negative net worth, is the correct choice for this question. A, B, C, and E may suggest financial difficulties, but they do not necessarily indicate insolvency.

When Is a Firm Insolvent from an Accounting Perspective