The ability of a business to pay its debts as they come due and to earn a reasonable net income includes
A) solvency and leverage
B) solvency and profitability
C) solvency and liquidity
D) solvency and equity

Question

Quizplus · Accepted Answer

Solvency refers to a company's ability to pay off its obligations as they come due, while profitability refers to a company's ability to generate earnings in excess of its expenses. Therefore, the ability of a business to pay its debts as they come due and to earn a reasonable net income includes solvency and profitability. Choice A is incorrect because while leverage is related to solvency, it does not directly address the ability to earn a reasonable net income. Choice C is incorrect because while liquidity is related to solvency, it does not directly address the ability to earn a reasonable net income. Choice D is incorrect because equity is related to a company's ownership structure, and does not directly address either solvency or profitability.

The Ability of a Business to Pay Its Debts as They