The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory and prepaid expenses.
The current ratio is calculated by dividing current assets by current liabilities, indicating a company's ability to pay short-term obligations.
The receivables turnover ratio measures how many times a company collects its average accounts receivable during a period, indicating the efficiency of credit sales collection.
The cash ratio is the most stringent liquidity ratio, calculated by dividing cash and cash equivalents by current liabilities, indicating the immediate liquidity position of a company.
Bad debt expense is the estimated amount of accounts receivable that a company does not expect to collect, recorded as an expense in the same period as the related sales.
Gross sales revenue is the total sales before any deductions, while net sales revenue is the amount after deducting returns, discounts, and allowances.
The two methods are the percentage of total credit sales method and the aging of accounts receivable method.
Contra revenue accounts are used to track deductions from gross revenue, such as sales returns and discounts, to arrive at net sales revenue.
The company must first reverse the write-off by debiting accounts receivable and crediting allowance for doubtful accounts, then record the cash collection.
The revenue recognized is $1,500, as the refund for the 2 pairs returned is $1,000.
A sales discount reduces the sales revenue recognized. For example, if a customer receives a 10% discount on a $2,500 purchase, the sales revenue would be $2,250.
