Multiple Choice
Which statement best describes the major drawback to the use of debt financing?
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9. Current Liabilities
Types of Liabilities
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Which type of liability refers to a financial obligation that must be repaid within one year?
A
Deferred revenue
B
Long-term liability
C
Contingent liability
D
Current liability
Verified step by step guidance1
Understand the definition of a current liability: A current liability is a financial obligation that a company expects to settle within one year or within its operating cycle, whichever is longer.
Compare the given options to the definition of current liability: Deferred revenue refers to income received before it is earned, which may or may not be classified as a current liability depending on the timing. Long-term liability refers to obligations that are due beyond one year. Contingent liability refers to potential obligations that depend on the occurrence of a future event.
Identify the key characteristic of current liabilities: They are obligations that must be repaid or settled within one year, such as accounts payable, short-term loans, or accrued expenses.
Eliminate options that do not match the definition of current liability: Deferred revenue, long-term liability, and contingent liability do not fit the criteria of obligations that must be repaid within one year.
Conclude that the correct answer is 'Current liability,' as it directly matches the definition provided in the problem.
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