Arizona Contractors License Practice Exam

What does the term "current liabilities" refer to?

1. Debts due in five years

2. Liabilities due within one year

3. Long-term loans

4. Assets expected to convert into cash

The correct answer is: Liabilities due within one year

The term "current liabilities" refers to obligations that a business must settle within one year. This includes debts and financial commitments that are expected to be paid off in the short term, typically within the operating cycle of the business. Current liabilities usually encompass accounts payable, short-term loans, accrued expenses, and other similar obligations, making it essential for understanding a company's short-term financial health and liquidity. Identifying current liabilities is crucial for stakeholders, as it reflects a company's ability to meet its immediate financial obligations. This gives insight into the firm's operational efficiency and financial strategy. In contrast, liabilities due in five years are classified as long-term liabilities, while long-term loans and assets expected to convert into cash fall outside the definition of current liabilities.