Asked by Perla Arceo-Valencia on Apr 25, 2024
Verified
Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing current assets or the creation of other current liabilities within
A) one year or operating cycle, whichever is longer
B) one year
C) one year or operating cycle, whichever is shorter
D) an operating cycle
Operating Cycle
A measure of the time span between the purchase of inventory and the collection of cash from accounts receivable, highlighting the time taken for a business to turn its inventory into cash.
Current Liabilities
Short-term financial obligations a company must pay within a year, such as accounts payable, short-term loans, and accrued expenses.
Liquidation
The process of bringing a business to an end and distributing its assets to claimants, often occurring when a company is insolvent and unable to meet its financial obligations.
- Recognize the accounting treatment and reporting of current liabilities.
- Understand the impact of operating cycles on the classification of liabilities.
Verified Answer
AM
andrew moore7 days ago
Final Answer :
A
Explanation :
According to generally accepted accounting principles (GAAP), current liabilities are those obligations that are reasonably expected to be settled within one year or the operating cycle of the business, whichever is longer. This means that if a business has a longer operating cycle, such as a manufacturing company with a cycle of more than one year, then the one-year timeline would not apply and the obligation would be classified as a current liability if it is expected to be settled within the operating cycle. Therefore, choice A is the correct answer.
Learning Objectives
- Recognize the accounting treatment and reporting of current liabilities.
- Understand the impact of operating cycles on the classification of liabilities.