What best defines the term "current liabilities"?

What best defines the term "current liabilities"?

• A. Obligations due within one year
• B. Loans and debts for the next five years
• C. All financial obligations of the company
• D. Only long-term debts

Answer: (A)

Current liabilities are best defined as obligations that a company expects to settle within one year or within its operating cycle, whichever is longer. This definition captures the immediate financial responsibilities that need to be addressed in the short term, providing a clear picture of the company's short-term financial health. Examples of current liabilities include accounts payable, short-term loans, and accrued expenses. The focus on obligations due within one year is essential for assessing a company's liquidity, as it indicates the resources needed to meet these debts with available assets. In contrast, loans and debts due over a longer period do not qualify as current liabilities and; therefore, do not fit the definition. Additionally, categorizing all financial obligations of the company or focusing only on long-term debts falls outside the scope of defining current liabilities, as these do not specify the time frame necessary for current liability classification.

Current liabilities are best defined as obligations that a company expects to settle within one year or within its operating cycle, whichever is longer. This definition captures the immediate financial responsibilities that need to be addressed in the short term, providing a clear picture of the company's short-term financial health. Examples of current liabilities include accounts payable, short-term loans, and accrued expenses.

The focus on obligations due within one year is essential for assessing a company's liquidity, as it indicates the resources needed to meet these debts with available assets. In contrast, loans and debts due over a longer period do not qualify as current liabilities and; therefore, do not fit the definition. Additionally, categorizing all financial obligations of the company or focusing only on long-term debts falls outside the scope of defining current liabilities, as these do not specify the time frame necessary for current liability classification.