The Acid-Test Ratio Is a More Stringent Measure of Liquidity

question 7

True/False

The acid-test ratio is a more stringent measure of liquidity than the cash ratio.

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Definitions:

Bad Debt Expense

This is an expense account reflecting the cost of accounts receivable that a company does not expect to collect.

Credit Card Discounts

It refers to the reduction in the amount receivable from customers who make payments through credit cards, accounting for the fees charged by the credit card companies.

Operating Expenses

The costs associated with running the day-to-day operations of a business, such as rent, utilities, and salaries.

Gross Profit

The difference between net sales and the cost of goods sold, indicating the efficiency of a company's production process.