Final answer:
The relationship between current liabilities and a company's operating cycle is that the former are expected to be settled within the latter timeframe. Current liabilities are primarily linked to the company's day-to-day business operations, and their management is crucial for maintaining liquidity and upholding creditor relationships. The operating cycle dictates the rhythm at which these short-term obligations need to be managed.
Step-by-step explanation:
The relationship between current liabilities and a company's operating cycle is significant as they are interrelated components of a company's financial health and liquidity. Current liabilities are financial obligations that a company expects to settle within its operating cycle, or one year if the cycle is shorter. The proper management of these liabilities coincides with the flow of the operating cycle to ensure the company can meet its short-term obligations without financial distress.
Option (a), 'Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less)', accurately describes this relationship. Current liabilities include accounts payable, short-term loans, taxes payable, and other obligations arising from the company's normal business operations. Efficient management of these liabilities allows a company to uphold good relationships with creditors and maintain a healthy working capital.
It should be made clear that while current liabilities arise from operating transactions, not all are the result of such transactions alone; they may also stem from financing or investing activities. However, their resolution is generally aligned with the timing of cash flows from the operating cycle.
Lastly, the statement (d) 'Current liabilities cannot exceed the amount incurred in one operating cycle' is not inherently true. A company could have current liabilities exceeding its operating cycle cash inflows due to various reasons such as aggressive growth strategies or temporary cash flow shortcomings, which might require them to look for additional financing solutions.