Question

How does the operating cycle affect the classification of assets and liabilitites as current or long term? Please explain.

Answer 1

Solution:-

The definition of current assets states that current assets are cash and other assets that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business."

Usually, when the normal operating period is less than one year, a one-year period is used to distinguish current assets from noncurrent assets. When the operating cycle is greater than one year, the operating period will serve as the proper period for the current assets' classification.