Which analysis best determines an individual's solvency and ability to pay debts?

• A. Comparing liquid assets with gross income
• B. Comparing cash assets with variable expenses
• C. Comparing total assets with total liabilities
• D. Comparing investment assets with net worth

Answer: (C)

Solvency is about whether a person has enough resources to cover all debts over the long term. A balance sheet that compares what you own (total assets) with what you owe (total liabilities) directly shows this: when assets exceed liabilities, you have positive net worth and can meet your obligations, indicating solvency. If liabilities exceed assets, solvency is in doubt.

Other options focus more on short-term cash flow or a subset of assets, which doesn’t fully capture the ability to pay all debts. For example, looking at liquid or cash assets versus income or expenses measures liquidity or cash flow, not overall solvency. Comparing investment assets to net worth also misses the complete picture of total obligations vs. total resources.