Final answer:
A firm is technically insolvent when its liabilities exceed its assets, indicating a situation where a firm may face challenges in funding operations or repaying its debts.
Therefore, option 1 ) is correct.
Step-by-step explanation:
A firm is technically insolvent when its liabilities exceed its assets. Insolvency can lead to bankruptcy if a firm cannot overcome its financial difficulties. When looking at the balance sheet, a negative net worth indicates that a firm's total liabilities surpass the value of its assets. This is a core component of insolvency, reflecting a situation where the firm's debts are greater than its available financial resources, casting doubt on its ability to continue funding operations or repay debts.
Profitability does not necessarily prevent insolvency; a firm can be profitable and still face cash flow problems that may lead to technical insolvency. Being unable to pay debts as they become due is a sign of financial distress and can cause a firm to seek protection under bankruptcy laws, thus potentially halting the trajectory towards bankruptcy.