Question

Which of the following is a criterion for the classification of a liability as current? I. It is a debt that can be paid from existing current assets. II. It is a debt that can be paid through the creation of other current liabilities. III. It must be paid within one year or the operating cycle, whichever is shorter.

Answer 1

Answer:

It must be paid within one year or the operating cycle, whichever is shorter.

Explanation:

Current liabilities are short term obligations that a company needs to pay within the current financial year. Companies use current assets to offset their current liabilities. Examples of current liabilities include accounts payable, interest payable on outstanding loans, dividends payables, and long term debts maturing within the current financial year.

A business needs to monitor its levels of current liabilities to ensure it has sufficient current assets to pay them. There are situations where a company finds it necessary to obtain a loan to finance its current liabilities. The inability to pay current debts consistently may be indicative of more profound financial challenges within the organization.