In liquidity terms, which term describes the situation where short-term debts exceed short-term assets?

In liquidity terms, which term describes the situation where short-term debts exceed short-term assets?

• A. Overtrading
• B. Liquidity crisis
• C. Insolvency
• D. Solvency

Answer: (A)

The main idea here is working capital and liquidity: can a business cover its short-term obligations with its short-term assets? When current liabilities exceed current assets, the firm faces a liquidity squeeze, meaning it doesn’t have enough liquid resources to meet debts due soon. This situation is commonly described as overtrading—a pattern where rapid growth or intense operating activity is financed mainly with short-term credit, so debts due in the near term outstrip readily available assets. The effect is tight cash flow and potential difficulty paying suppliers or other obligations unless more working capital is found. A liquidity crisis is a broader term for cash shortages in general; insolvency means being unable to pay all debts as they fall due or having more liabilities than assets, and solvency is the opposite, referring to long-term ability to meet obligations. So overtrading best captures the described short-term imbalance.

The main idea here is working capital and liquidity: can a business cover its short-term obligations with its short-term assets? When current liabilities exceed current assets, the firm faces a liquidity squeeze, meaning it doesn’t have enough liquid resources to meet debts due soon. This situation is commonly described as overtrading—a pattern where rapid growth or intense operating activity is financed mainly with short-term credit, so debts due in the near term outstrip readily available assets. The effect is tight cash flow and potential difficulty paying suppliers or other obligations unless more working capital is found. A liquidity crisis is a broader term for cash shortages in general; insolvency means being unable to pay all debts as they fall due or having more liabilities than assets, and solvency is the opposite, referring to long-term ability to meet obligations. So overtrading best captures the described short-term imbalance.