What financial situation does insolvency describe?

Insolvency describes a financial situation where total liabilities exceed total assets. This means that the individual or entity owes more than it owns, which is a clear indicator of financial distress. When liabilities surpass assets, it raises concerns about the ability to pay debts as they come due. This situation can lead to bankruptcy if not resolved, as it implies a fundamental imbalance in financial health.

The other options, while related to financial condition, do not specifically define insolvency. A negative net income indicates a loss but does not necessarily mean that the total liabilities exceed total assets. Lacking liquid assets refers to the availability of cash or easily convertible assets, but one could still technically be solvent if the total value of assets exceeds liabilities, albeit not liquid. Lastly, investments yielding no returns pertain to the performance of investments rather than a balance sheet analysis. Therefore, the essence of insolvency lies primarily in the relationship between total liabilities and total assets, making the first choice the most accurate representation.