If current liabilities exceed current assets, what term describes the liquidity problem faced by the firm?

If current liabilities exceed current assets, what term describes the liquidity problem faced by the firm?

• A. Insolvency
• B. Overtrading
• C. Solvency
• D. Liquidation

Answer: (B)

When current liabilities exceed current assets, the business can’t meet its short-term obligations from its everyday resources. This is a liquidity issue tied to working capital. The situation is commonly described as overtrading—the firm has expanded or is selling more, but its working capital isn’t sufficient to finance that activity, leading to cash shortages. Insolvency would mean total liabilities exceed assets on the balance sheet and often involves formal remedies; solvency is the opposite, where assets cover liabilities. Liquidation is the process of winding up the company due to insolvency. So the term for this short-term liquidity problem is overtrading.

When current liabilities exceed current assets, the business can’t meet its short-term obligations from its everyday resources. This is a liquidity issue tied to working capital. The situation is commonly described as overtrading—the firm has expanded or is selling more, but its working capital isn’t sufficient to finance that activity, leading to cash shortages. Insolvency would mean total liabilities exceed assets on the balance sheet and often involves formal remedies; solvency is the opposite, where assets cover liabilities. Liquidation is the process of winding up the company due to insolvency. So the term for this short-term liquidity problem is overtrading.