Virginia Contractor General Practice Test

Which statement best describes current liabilities?

1. Debts expected to be paid after one year

2. Debts expected to be paid within one year

3. Debts that have no set payment terms

4. Debts that are secured by assets

The correct answer is: Debts expected to be paid within one year

Current liabilities are defined as obligations that a company is expected to settle within one year or within its operating cycle, whichever is longer. These liabilities typically include accounts payable, short-term loans, accrued expenses, and other similar debts that require payment in the near term. Understanding that current liabilities are short-term in nature is crucial for assessing a company's liquidity and financial health. They provide insight into how well a business can meet its immediate financial obligations, as these debts need to be settled with either cash or other current assets. In the context of the other options, the definition of current liabilities is distinct from long-term debts, which are expected to be paid after one year. Likewise, liabilities without set payment terms do not fit the current liabilities category, as they typically require clear repayment schedules. Secured debts, while they may be current, are not exclusively classified as such since security pertains more to the type of collateral backing the obligation rather than its time frame for payment.