Question

Current liabilities are liabilities that:

1-will be converted to cash within a year.
2-must be paid within a year.
3-will be converted to equity within a year.
none of the above.

Answer 1

Current liabilities must be paid within a year and are detailed on a company's balance sheet. They are critical in evaluating a company's liquidity and in understanding the asset-liability time mismatch in financial institutions.

Step-by-step explanation:

Current liabilities are a crucial component on a company's balance sheet, which is an accounting tool that lists assets and liabilities. The answer to the student's question is that current liabilities are liabilities that must be paid within a year. These are obligations the company needs to settle through the use of current assets or by creating other current liabilities. Examples of current liabilities include accounts payable, short-term debt, and other similar obligations.

An asset-liability time mismatch occurs when customers can withdraw a bank's liabilities in the short term while customers repay its assets in the long term. Understanding the concept of current liabilities also helps in assessing a company's liquidity, which refers to how quickly it can use a financial asset to buy a good or service or settle its debts.