Question

How are current liabilities related by definition to current assets? How are current liabilities related to a company’s operating cycle?

Answer 1

Part 1

Current liabilities are the obligations that are paid or fulfilled within one-year duration. These liabilities are liquidated by making use of resources that are categorized as current assets. Current assets are assets that converted into cash within  one-year duration. Another way, to meet current obligations to generate other current liabilities.

Part 2

The operating cycle refers to the average period of time required to use cash to produce goods and sell the goods, and return it to the cash account by receiving it from customers in exchange for the goods. Current liabilities are by definition are related to current assets and current assets by definition are related to the operating cycle. In this way, the liabilities are related to the operating cycle.