Question

When is a firm considered in bankruptcy?

a) Less than $1.00
b) Zero
c) Less than $5.00
d) Negative

Answer 1

The correct answer is option b) Zero.

Step-by-step explanation:

A firm is considered to be in bankruptcy when it has declared itself insolvent, which means that the firm is unable to pay its debts as they come due. This is usually reflected on the balance sheet when the firm's liabilities exceed its assets resulting in a negative net worth.

However, the official determination of bankruptcy is a legal process that must be declared by a court. A company's stock value (referring to choices a, c, d) or specific monetary threshold is not a direct indicator of bankruptcy.

The bankruptcy process involves evaluating the firm's assets and liabilities and can result in different outcomes such as reorganization under Chapter 11 of the U.S. Bankruptcy Code, or liquidation under Chapter 7. During this process, the company's management may be displaced, and a trustee or debtor-in-possession takes over to manage the firm's operations, assets, and the plan for repayment of debts.