Indicate whether each of the following statements is true or false.________ a) Operating cycles for most businesses are less than one year.________ b) If a business does not plan to use any of its current assets to repay a debt, then that debt is listed as long term even if it is due within a year.________ c) The current ratio is computed by dividing current assets by net income.________ d) The current ratio is a useful measure of a company's liquidity.________ e) Liquidity is the ability of a business to repay liabilities in the long run.

Question

What will be an ideal response?

Answer 1

a) T b) T c) F d) T e) F

a) This is true. An operating cycle is defined as the average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash. For most businesses, the operating cycle is less than one year. 
b) This is true. In general, if a business does not plan to use any of its current assets to repay a debt, that debt is listed as long term even if it is due within one year. 
c) This is false. Current ratio is equal to current assets divided by current liabilities. 
d) This is true. The current ratio is a measure of liquidity. 
e) This is false. Liquidity describes the ability to generate sufficient short-term cash flows to pay obligations as they come due.