Multiple Choice
A known obligation of an uncertain amount that can be reasonably estimated is called a(n) ______ liability.
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9. Current Liabilities
Types of Liabilities
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A current liability is a debt that can reasonably be expected to be paid:
A
within one year or the operating cycle, whichever is longer
B
only when the company is liquidated
C
over a period exceeding one year
D
after five years from the balance sheet date
Verified step by step guidance1
Understand the definition of a current liability: A current liability is a debt or obligation that a company expects to settle within a short period, typically within one year or the operating cycle, whichever is longer.
Review the concept of the operating cycle: The operating cycle refers to the time it takes for a company to purchase inventory, sell it, and collect cash from customers. If the operating cycle is longer than one year, the current liability timeframe extends to match the operating cycle.
Analyze the options provided in the problem: Evaluate each option to determine which aligns with the definition of a current liability. For example, liabilities paid only when the company is liquidated or after five years do not meet the criteria for current liabilities.
Focus on the correct timeframe: Current liabilities are expected to be settled within one year or the operating cycle, whichever is longer. This is the key distinguishing factor for identifying current liabilities.
Conclude by selecting the correct answer: Based on the definition and analysis, the correct answer is 'within one year or the operating cycle, whichever is longer.'
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