Question

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

Answer 1

Any business pays current liabilities from the current assets. Current liabilities are immediate obligations of the business which require the use of existing liquid resources known as current assets. Since the current liabilities are dependent upon current assets and current assets depend upon the operating cycle we can say that the current liabilities are related to the operating cycle. Operating cycle is the average time required to manufacture and sell goods and finally generate cash from customers. It determines the speed at which raw material is converted into cash. Hence it determines current assets as well as current liabilities.