Impact of Increased Liabilities on Financial Stability

Hard Financial Statements Balance Sheet

Upon reviewing the balance sheet of a financial institution, you notice a significant increase in total liabilities compared to the previous fiscal year.

One of the key items affecting this change is the institution's reliance on short-term borrowing, which can lead to heightened financial risk.

To better understand the implications of this increase in liabilities, particularly in the context of the balance sheet, which of the following statements is true regarding the impact of this change on the company's financial stability?

An increase in liabilities without a corresponding increase in assets typically signals a deterioration in financial stability.

A rise in short-term liabilities can enhance a company's liquidity position if managed properly.

An increase in total liabilities always indicates that a company is at risk of insolvency.

Hint

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