The Acid-Test Ratio Differs from the Current Ratio

question 318

Multiple Choice

The acid-test ratio differs from the current ratio

• A)Because it excludes prepaid expenses and inventory
• B)Because liabilities are divided by current assets
• C)Because it measures profitability
• D)Because it excludes short-term investments
• E)Because it excludes prepaid expenses and inventory and because it measures profitability

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Definitions:

Autonomous Consumption

the level of consumption that occurs when income is zero, representing the expenditures necessary to meet basic needs.

Disposable Income

Available cash for households to utilize in saving and spending after income taxes have been processed.

Savings

Money that is set aside from income for future use, often stored in a bank or invested to generate returns.

Disposable Income

Households' spendable and savable funds following income tax deductions.