What Are Quick Assets?
Quick assets are assets possessed by a company that have immediate commercial value and can swiftly be converted into cash or are already in cash form. These assets are highly liquid, comprising cash and equivalents, marketable securities, and accounts receivable. Quick assets play a pivotal role in various financial calculations, notably in determining the quick ratio, a key indicator in decision-making processes.
Key Takeaways
- Current and quick assets are crucial categories on a company’s balance sheet, aiding analysts in evaluating liquidity.
- Quick assets encompass a company’s cash and equivalents, marketable securities, and accounts receivable, all easily convertible to cash.
- Quick assets provide a more conservative gauge of a company’s liquidity when compared to current assets, excluding inventories.
- The quick ratio assesses a company’s immediate ability to settle current liabilities without relying on inventory sales or additional financing.
The Basics of Quick Assets
Quick assets stand out from other asset types by representing resources that can swiftly be converted to cash without significant loss. These encompass cash, marketable securities, and accounts receivable while excluding inventories, which may take longer to liquidate for cash.
Companies often maintain cash and marketable securities as part of their quick assets to address immediate operational, investing, or financing needs. In cases of low cash reserves, companies can tap into credit lines to ensure liquidity.
The composition of quick assets varies based on business nature and industry. Corporate-focused ventures may hold substantial accounts receivable balances, while retail firms serving individual consumers may have minimal receivables on their balance sheets.
Example of Quick Assets: The Quick Ratio
Quick assets, especially cash, marketable securities, and accounts receivable, are pivotal in evaluating a company’s ability to meet short-term obligations within a year. The quick ratio (acid test) calculates a company’s liquidity by dividing the sum of these quick assets by its current liabilities. This ratio aids in predicting a company’s financial standing during revenue fluctuations or slowed cash inflows.
The formula for the quick ratio is represented as
Quick Ratio = C & E + MS + AR Current Liabilities where: C & E = cash & equivalents MS = marketable securities AR = accounts receivable
or
Quick Ratio = CA − Inventory − PE Current Liabilities where: CA = current assets PE = prepaid expenses
Quick Assets Versus Current Assets
Quick assets provide a conservative measure of a company’s ability to cover short-term liabilities with immediate resources, as they exclude less liquid assets like inventory. This focus on the company’s most liquid assets provides insight into its liquidity position.
Contrasting the quick ratio, the current ratio includes inventories in a company’s total current assets divided by current liabilities. The quick ratio imposes a stricter evaluation of a company’s liquidity compared to the current ratio.
The term “quick” traces back to Old English, where “cwic” meant “alive” or “alert.”