Question

The ability for a company to meet its liability obligations is important when assessing financial stability. Consider what high liability balances might indicate about a company and explain the pros and cons of this type of balance. Provide real-world examples to illustrate your ideas.

Answer 1

Solution:

• While surveying financial liability , the risk some portion of the accounting report or balance sheet is analysed, which comprises of long haul liability and short term liability.
• High liability balance in a Balance sheet is viewed as negative part of the business as it demonstrates that the entity is debt ridden. It is additionally seen that in the event that the entity can't reimburse its debt on schedule, at that point it may lead stopping down business.
• Other than above, it shows a high liability proportion and low equity. Likewise, inadequacy of money and bank balance (that is liquidity situation) might be the motivation to get the liability.
• High liability balance is itself disadvantageous to the entity due to above components. Likewise, it makes a negative picture in the minds of partners and credit rating organizations.
• Just advantage of taking debt is that ,when the interest rate is lower than the arrival on value or equity. Likewise, tax cut on enthusiasm on loan is taken by the entities.
• In nutshell, we can say that, high risk or liability balance isn't advantageous for the business.