CFA Level IFinancial Statement AnalysisEasy
A retailer has a normal operating cycle of 9 months. Which of the following items should be classified as a current asset on its balance sheet?
- AMerchandise inventory expected to be sold within 10 months
- BA long-term equity investment held for strategic control purposes
- CManufacturing equipment with a remaining useful life of 8 years
- DA note receivable from a supplier due in 14 months, unrelated to normal trade
Show answer & explanationAnswer & explanation
Correct answer: A. Merchandise inventory expected to be sold within 10 months
An asset is classified as current if it is expected to be converted to cash or used up within one year or the operating cycle, whichever is longer. Since the operating cycle (9 months) is shorter than one year, the one-year threshold applies. Inventory to be sold in 10 months qualifies as current since it is within 12 months.
Why the other options are wrong
- B. Incorrect — strategic long-term investments are noncurrent regardless of the operating cycle.
- C. Incorrect — equipment with an 8-year life is a noncurrent (long-lived) asset.
- D. Incorrect — 14 months exceeds the one-year cutoff and is unrelated to the shorter operating cycle.
Current Asset Classification Rule
An asset is current if expected to be converted to cash, sold, or consumed within one year or the operating cycle, whichever is longer.
- Use the LONGER of 1 year or operating cycle
- Applies mainly when operating cycle exceeds 12 months
- Strategic investments and PP&E are generally noncurrent
Memory trick: Pick the LONGER yardstick — year or cycle