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For the purpose of classifying liabilities as current or noncurrent, the term operating cycle...

Question:

For the purpose of classifying liabilities as current or noncurrent, the term operating cycle refers to:

a. a period of 1 year.

b. the period between the date of sale and the date the related revenue is collected.

c. the period between the purchase of merchandise and the conversion of this merchandise back to cash.

d. the average period between business recessions.

Current liabilities:

Current liabilities are short-term. They are usually paid through current assets. A company's current liabilities should always be less than its current asset to stay in a healthy financial situation. A current ratio can also help to assess liquidity.

Answer and Explanation: 1

Option c is correct.

Liability is basically any financial obligation to pay. To classify any financial obligation as current or non-current usually a period of one year or an operating cycle is considered. An operating cycle is a period between the purchase of inventory and its conversion to cash through the sale.

An explanation for incorrect options:

Option a: a period of one year is the usual accounting year.

Option b: the period between the sale and revenue collection is not based on liability classification.

Option d: the average period between recessions is again not related to liability classification.


Learn more about this topic:

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Operating Cycle & Cash Cycle: Definition & Calculations

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Chapter 17 / Lesson 2
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The operating cycle and cash conversion cycle are both tools to evaluate the timeline of when a business will become profitable. Explore the calculations of each, and identify their importance to a business.


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