cant someone help me
Explain why the use of current liabilities as opposed to long-term debt subjects the firm to a greater risk of insolvency.
Current liabilities should be settled within short time (< 1 year). So you need money to pay now and have a little time to get profit (money) within your normal business process.
Due to the following reasons:
- You may need to pay off current liabilities from your working capital
- You may have to get additional short term loans to pay off your existing short term loans for example overdraft
- Current liabilities have time constraints rather than Long-term liabilities which are not to be paid immediately and the interest rate is also low.
- Since you have short time to pay off sort term liabilities, non-payment of the same may result in legal issues
There are many other reasons. Above are only a few. Refer our ACCA section for useful information about International Accounting Standards