Final answer:
The ability of a business to pay its debts is called solvency, which signifies the company's long-term financial health and ability to meet its long-term financial obligations. It is different from liquidity, which is about how easily assets can be converted to cash for immediate expenses.
"The correct option is approximately option 2"
Step-by-step explanation:
The ability of a business to pay its debts is called solvency. Solvency refers to the long-term financial stability of a company and its ability to meet its long-term debts and financial obligations.
This is different from liquidity, although the two terms are related. Liquidity describes how quickly and easily assets can be converted into cash or other forms of payment without significant loss of value. Cash, for instance, is considered the most liquid asset because it can be readily used to pay for goods and services, like buying a hamburger. In contrast, assets in a savings account are less liquid because they require additional steps, such as visiting a bank to withdraw the funds.
When discussing the financial health of a business, it's important to understand that both liquidity and solvency are vital. A business that is solvent is able to meet its long-term debts and is likely in a better position to borrow money through banks or by issuing bonds. Firms that cannot demonstrate solvency might struggle to access capital and face increased risk of bankruptcy.
To clarify, the options given for the question are: 1) fiscal year, 2) solvency, 3) currency, and 4) liquidity. The fiscal year is a one-year period that businesses and governments use for financial reporting and budgeting. Currency is generally referred to as money in any form when it is in actual use or circulation as a medium of exchange, specifically circulating banknotes and coins. As we've defined already, solvency and liquidity have to do with a business's financial stability and ability to quickly turn assets into cash, respectively. In this case, option 2, solvency, is the correct answer to the question about a business's ability to pay its debts.