Question

What best describes the financial concept of debt serviceability?  

A.	The ability to pay interest expense during the year.
	B.	The ability to pay long-term debt as it becomes due.
	C.	The ability to sell inventory.
	D.	The ability to satisfy short term obligations.

Answer 1

a. ability to pay only interest during the year is not going to reduce the outstanding loan amount of any entity, which in turn can harm or can say give negative ideas about the entity because it is not generating enough cash surplus to pay some part of principal amount of loan outstanding.

b. ability to pay long term debt as it becomes due is a very good sign for any entity as it shows that the entity has enough resources to pay its long term debt and the management is not going to default on any debt.

c. there is nothing to do with debt serviceability of any entity with its ability to sell its inventory except by selling its inventory that entity can generate cash to service its debt and other expenses.

d. for any entity short term obligations are credit purchase, operation expenses etc bu not any debt from financial institutions. so ability to satisfy short term obligations only indicates that the entity is able to generate enough cash for smooth running of its business except debt servicing.

From above discussion it is clear that B the ability to pay long term debt as it becomes due best describe the financial concept of debt serviviability.