Asked by Andrea Diaz-Rodriguez on Jul 03, 2024
Verified
If drawing on an operating line of credit results in a negative cash balance, a current liability known as bank indebtedness results.
Operating Line of Credit
A type of financing arrangement providing a business with the ability to borrow money up to a certain limit for operational purposes.
Negative Cash Balance
A situation where a company or individual's cash account balance drops below zero, indicating that the account is overdrawn.
Current Liability
Short-term financial obligations that are due within one year or within a normal operating cycle.
- Recognize the features of current liabilities and their repercussions on liquidity levels.
Verified Answer
KD
Kamaris DavisJul 10, 2024
Final Answer :
True
Explanation :
Drawing on an operating line of credit beyond the available cash balance creates a liability for the company, as it owes the bank money, thus resulting in bank indebtedness, which is classified as a current liability because it is typically due within one year.
Learning Objectives
- Recognize the features of current liabilities and their repercussions on liquidity levels.