Question

Knowledge Check 01 Obligations that are due within one year are: O reported as a current liability. O reported as a long-term liability. O reported as both a current and a long-term liability. O recorded only if it must be paid within the current year.

Answer 1

Answer: Option-(a): reported as a current liability Reason: On a firm's balance sheet, liabilities block contains details about amount owed by firm to various stakeholders such as vendors, bankers, other financial institutions, general public, tax authorities, etc. Liabilities are cetegorized into current liabilities and long-term liabilities based on their duration (or period within which they shall be settled). Those liabilities that are to be paid off within one year from the last day of reporting period are classified as current liabilities, otherwise, they are classified as long-term liabilities. In simple words, liabilities that fall due immediately within one year from the last day of reporting period are current liabilities. Therefore, option-(a) is the correct answer. Option-(b) and (c) are incorrect because liabilties that are due within one year cannot be classified as long-term liabilities. Option-(d) is incorrect because any obligations paid within current year cannot be considered as liabilities at all because obligations are disbursed.