Part 1When is a liability classified as current? Part 1
A. If the entity's operating cycle is less than one month, then the liability will be classified as current if it is due and payable within three years. B. A liability is classified as current if the obligation is liquidated through the use of a current asset or the creation of another current liability. C. A liability that is due and payable within one year, or operating cycle if longer than one year, from the balance sheet date is classified as current. D. The liability must be due and payable within five years from the balance sheet date.

Question

Part 1When is a liability classified as​ current? Part 1
A. If the​ entity's operating cycle is less than one​ month, then the liability will be classified as current if it is due and payable within three years. B. A liability is classified as current if the obligation is liquidated through the use of a current asset or the creation of another current liability. C. A liability that is due and payable within one​ year, or operating cycle if longer than one​ year, from the balance sheet date is classified as current. D. The liability must be due and payable within five years from the balance sheet date.

BlackTom AI · Accepted Answer

Here we analyze what determines whether a liability is classified as current in financial reporting.
Option A: This statement ties current classification to a very short operating cycle and then uses a vague three-year payable window. In practice, current classification depends on the maturity relative to either the entity's operating cycle or one year, whichever is longer. The specific thresholds and the mention of a three-year window without tying to the standard operating cycle misstates the criteria, making this option incorrect.
Option B: This option says a liability is current if it is liquidated through the use of a current asset or by creating another current liability. While the existence of using current assets or incurring another current liability could occur in the short term, this does not define current classification. The key criterion is the maturity period, not the mechanism of liquidation, so this choice is not aligned with standard classification rules.
Option C: This statement accurately reflects the standard rule: a liability is current if it is due and payable within one year, or within the operating cycle if that cycle is longer than one year, from the balance sheet date. This captures the core concept that current liabilities are those expected to be settled in the near term, within the shorter of the two horizons (one year or the operating cycle).
Option D: This option asserts a fixed five-year horizon for current classification. In reality, five years is too long to classify as current under GAAP/IFRS, where current liabilities are generally within one year or the operating cycle if longer than one year. Thus, this statement is incorrect and inconsistent with standard practice.

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