Solvency is a measure of a firm's ability to pay its which?

• A. Total debt
• B. Short-term liabilities
• C. Current assets
• D. Net income

Answer: (A)

Solvency measures a firm’s ability to meet its long-term obligations and continue operations over time. It focuses on whether the company can pay all of its debts as they come due, which is tied to the total amount of debt it carries relative to its assets and equity. That’s why the option about total debt best fits solvency: it reflects the full debt burden the company must be able to repay, not just short-term cash needs or profitability.

The other choices describe aspects that don’t capture long-run debt-paying ability. Short-term liabilities relate to immediate cash needs (liquidity) rather than long-term solvency. Current assets indicate resources on hand but don’t by themselves show whether debts can be covered. Net income reflects profitability, not the capacity to meet debt obligations.