Question

A receivable classified as current on the statement of financial position is expected to be collected within:________a. The current operating cycle.b. 1 year.c. The current operating cycle or1 year, whichever is longer.d. The current operating cycle or1 year, whichever is shorter.

Answer 1

Answer:

c. The current operating cycle or 1 year, whichever is longer.

Explanation:

As we know that

Current assets are comprised of cash & cash equivalents, inventory, account receivable, prepaid insurance, short term investment, and other current asset. These current asset is also known as the liquid asset that determines that these item would be converted into cash within one year

And the operating cycle would be the time between the material purchase and actual cash received.

So, The operating cycle = Days inventory outstanding + days sale outstanding

where,

Day inventory outstanding = (Beginning inventory + ending inventory) ÷ cost of goods sold × number of days in a year

Day sale outstanding = (Beginning Accounts receivable + ending Accounts receivable) ÷ Net sales × number of days in a year

Therefore, The collection period would be the maximum of the current operating cycle or 1 year.