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What is the relationship between current liabilities and accompanies operating cycle?

What is the relationship between current liabilities and accompanies operating cycle?
A. There is no relationship between the two
B. Current liabilities can’t exceed the amount incurred in one operating cycle
C. Current liabilities are the result of operating transactions
D. Liquidation of current liabilities is reasonably expected within the companies operating cycle

Answer: D. Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).

Explanation:

Current liabilities and a company's operating cycle are closely intertwined. Current liabilities represent a company's short-term financial obligations, typically due within one year or the operating cycle (whichever is longer). Examples include money owed to suppliers (accounts payable), unpaid expenses (accrued expenses), and short-term loans. The operating cycle, on the other hand, refers to the average time it takes a company to convert raw materials into finished goods, sell those goods, and collect cash from customers.

The key connection lies in how these two concepts work together. Companies rely on their current assets, such as cash, inventory, and accounts receivable, to settle their current liabilities. Ideally, a company aims to generate enough cash through sales of inventory (within their operating cycle) to cover their short-term debts. So, the length of the operating cycle can influence how much current debt a company can comfortably manage. In other words, a company with a longer operating cycle (where it takes a longer time to convert inventory to cash) might need to maintain a lower level of current liabilities compared to a company with a shorter operating cycle.