Question

Describe how a company's operating cycle relates to current liabilities.

Current liabilities are unrelated to a company's operating cycle.

Operating transactions produce current liabilities.

Within the company's operating cycle (or within one year, if less), liquidation of current liabilities is reasonably expected.

The amount incurred in one operating cycle must be higher than current liabilities.

Answer 1

Correct answer is

Operating transactions produce current liabilities.

Operating cycle refers to the period between purchase of raw materials and input services and receipt of cash from final sale of goods or services. The operating transactions that forms the operating cycle generates the current liabilities. For example, the purchase of raw materials increases accounts payable for merchandise.