Michigan Residential Builders License Practice Test

Which of the following is an example of a liability?

1. Cash in bank

2. Loan payable

3. Inventory on hand

4. Accounts receivable

The correct answer is: Loan payable

A liability is defined as a financial obligation or debt that a company owes to another party, which is expected to be settled over time. In the context of the provided options, a loan payable is a clear example of this, as it represents money borrowed that must be repaid on specified terms. This obligation will typically involve future cash outflows, making it a liability on the financial statements. On the other hand, cash in the bank, inventory on hand, and accounts receivable are classified as assets. These can be converted into cash or used in the operation of the business, contributing to the company’s value and financial health. Recognizing liabilities accurately is crucial for understanding a business's financial position, as liabilities can affect cash flow and overall financial stability. Thus, the identification of a loan payable as a liability highlights the importance of managing debts responsibly within a business.