Understanding Liabilities Auburn Corporation has experienced rapid growth in its current assets and property, plant, and equipment as a result of increased sales.

a. Is Auburn’s growth in inventories likely to be financed by current or long-term liabilities? Explain.

b. Is Auburn’s growth in property, plant, and equipment likely to be financed by current or long-term liabilities?

Explain.

c. Although Auburn’s total liabilities do not seem excessive, nearly all of them are in the form of current liabilities.

What cash flows should be used to repay current liabilities? What might cause an investor to conclude that a disproportionate amount of liabilities is in the form of current liabilities?

d. Auburn’s controller has suggested that its liabilities should be classified as current or long-term based on whether the money received was used to acquire current or long-term assets. In what way might an investor be misled if this approach is adopted?