Skip to content

ACCA Applied Skills · Corporate and Business Law (Global) · Insolvency and administration

Zephyr Ltd has assets worth 900,000 and liabilities of 1,200,000 in total, but it has enough cash to pay every debt as it falls due over the next year. Which statement best describes its position under the balance sheet insolvency test?

Zephyr is balance sheet insolvent because its liabilities of 1,200,000 exceed its assets of 900,000. The balance sheet test compares assets with liabilities. Its ability to pay debts as they fall due relates to the separate cash flow test, not this one.

  1. AIt is balance sheet insolvent because its liabilities exceed its assetsCorrect
  2. BIt is not insolvent under any test because it has enough cash
  3. CIt is cash flow insolvent because its liabilities exceed its assets
  4. DIt is solvent on the balance sheet test because it can pay debts as they fall due

Explanation

The balance sheet test compares total assets with total liabilities. Here liabilities of 1,200,000 exceed assets of 900,000, so the company is balance sheet insolvent. Paying debts as they fall due is the cash flow test, which is a different test, so the last option confuses the two.

Did you get it right without looking?

One question tells you little. A timed set on Insolvency and administration shows your real accuracy, how long you take and where you lose marks.

Practise Insolvency and administrationFree diagnostic mock

More Insolvency and administration questions