Updated: February 27, 2023
KEY TAKEAWAYS
- Quick assets are the most liquid types of assets a company has. They include cash, short-term investments, and any other assets into cash.
- Traditional accounting methods require companies to estimate the value of these types of assets.
- This informs investors of their real exposure.
- Quick assets are often referred to as quick or liquid assets because they can turn into fast cash.
What Are Quick Assets?
Quick assets are a company’s cash and cash equivalents, as well as things that can be easily turned into cash. They’re usually shorter-term cash investments in securities, stocks, or other forms of equity.
Why Are Quick Assets Important?
Quick assets allow a company to have access to its current ratio of working capital for daily operations.
Many companies rely on quick assets to help them get through strained financial periods. For example, a company might use its lines of credit for a quick cash infusion.
You can use this new cash balance for anything from paying employees to purchasing inventory. Quick assets are always current as they can convert to cash in a year or less. But sometimes companies keep some of their assets in an alternate form of cash that cannot easily cash out.
Moreover, these assets cannot convert to cash. Accounting standards and financing requirements dictate companies report the valuation of these assets. This is so investors know what the company’s real exposure is.
When investors know where each source of financing comes from, they can determine the fair market value of your business.
How to Calculate Quick Assets
Quick assets are part of your current assets, like inventory. So you must subtract inventories from current assets to get quick assets.
Moreover, you need quick assets if you want to know your quick ratio. With this, you’ll know whether your company can cover short-term debt using your liquid assets.
You can find this information on your balance sheet assets. It’s found under current assets and liabilities. Using this information is an acid test for your business.
Quick Assets Formula
The formula to calculate quick assets is:
You’re looking for the total cash form that the company has on hand plus any short-term investments (inventory). You then subtract any inventory from your current assets to get your company’s “quick” assets.
The formula for calculating quick ratio is:
To calculate a company’s quick assets, you must gather:
- Its total cash
- Cash equivalents
- Accounts receivable
- Short-term investments
You can find this information on a company’s balance sheet.
For example, assume that ABC Corporation has $100,000 in cash, $200,000 in accounts receivable, and $300,000 in short-term investments. Its quick assets would be $600,000.
The quick ratio is a valuable tool for investors because it can give them an idea of a company’s liquidity. That is, how easily it can pay off its short-term obligations.
A company with a quick ratio of less than 1 may have difficulty paying off its liabilities. A company with a quick ratio of more than 1 should have no problem doing so.
List of Quick Assets
As you compile your list of quick assets, keep in mind that it’s anything you can use to quickly convert to cash and use for day-to-day operations. This might be to purchase inventory or pay bills.
Some quick assets are:
- Cash in bank accounts
- Cash investments
- Marketable securities
- Short-term investments
- Current account receivables
Other types of business assets that are not considered quick assets are things such as:
- Land
- Buildings
- Equipment
- Patents
- Copyrights
- Goodwill
Example of Quick Assets
When it comes to financial analysis, the quick ratio is an important metric to consider. This ratio provides insights into a company’s short-term liquidity, or if it can pay off its short-term obligations.
The quick ratio’s current assets and liabilities give a more accurate picture of a company’s financial health than the current ratio.
While a higher quick ratio is generally better than a lower one, it’s important to put this ratio in context. For example, a company with a very high quick ratio may be holding too much cash on its balance sheet, which could be put to better use.
Likewise, a company with a very low quick ratio may be at risk of defaulting on its obligations. As such, it’s important to consider the quick ratio in conjunction with other financial ratios and metrics.
Summary
As you can see, the quick ratio is a pretty simple calculation. However, it’s also an important one. The quick ratio lets you know how well a company can pay its short-term obligations without having to sell off any of its inventory.
This is important because it gives you an idea of how liquid the company is. A company with a high quick ratio is typically considered to be more liquid than a company with a low quick ratio.
Now that you know how to calculate the quick ratio, you can start using it to analyze companies. Just remember to keep in mind that the quick ratio is just one tool in your financial analysis toolbox.
FAQs About Quick Assets
What are quick assets vs current assets?
Quick assets are a type of current asset. All quick assets are current assets, but not every current asset is a quick asset. This is because there are some current assets, like inventory, that can take longer to convert into cash. These are long-term assets.
This is important to know because it will affect how you calculate your company’s quick ratio. Keep reading for instructions to do this.
What are non-quick assets?
Non-quick assets are any type of asset that cannot be quickly converted into cash. This might include things like long-term debt obligations, property, and equipment. Non-liquid assets are important to know because they can affect a company’s ability to pay its short-term liabilities.
What is quick assets ratio?
The quick ratio is an acid test ratio that measures a company’s ability to pay its short-term liabilities with its quick assets.
To calculate the acid test ratio, you must divide a company’s quick assets by its current liabilities. You’re also subtracting prepaid expenses and inventory.
The formula for the acid test ratio is:
Acid Test Ratio = Quick Assets – Prepaid Expenses – Inventory
Both the quick ratio and acid test ratio are liquidity ratios that show if a company can pay its short-term obligations.
I'm an expert in financial analysis and accounting, with a deep understanding of the concepts related to quick assets, liquidity ratios, and financial health of companies. I've been actively involved in analyzing financial statements and advising on investment strategies. Let's delve into the key concepts covered in the provided article:
Quick Assets: Quick assets are the most liquid types of assets that a company possesses. They include cash, short-term investments, and other assets that can be easily converted into cash within a year. Quick assets are crucial for a company's daily operations and are often referred to as liquid assets.
Importance of Quick Assets: Quick assets provide a company with access to its current working capital for daily operations. During financially challenging periods, companies rely on quick assets to navigate through by using sources like lines of credit for a quick cash infusion. Investors use information about quick assets to assess a company's real exposure and determine the fair market value of the business.
Calculation of Quick Assets: Quick assets are part of current assets, and the quick ratio is used to assess a company's ability to cover short-term debt using liquid assets. The formula for quick assets is the total cash on hand plus short-term investments, with inventory subtracted from current assets. The quick ratio is then calculated by dividing quick assets by current liabilities.
List of Quick Assets: Examples of quick assets include cash in bank accounts, cash investments, marketable securities, short-term investments, and current account receivables. These are assets that can be quickly converted to cash for day-to-day operations. In contrast, non-quick assets, such as land, buildings, equipment, patents, and copyrights, cannot be easily converted into cash.
Example and Analysis of Quick Assets: The quick ratio is a key metric for financial analysis. A higher quick ratio indicates better short-term liquidity, but it's essential to consider the context. A very high quick ratio may suggest excessive cash holdings, while a low ratio may indicate a risk of defaulting on obligations. Therefore, the quick ratio should be analyzed in conjunction with other financial ratios and metrics.
FAQs About Quick Assets: The article provides additional information through frequently asked questions, covering topics like the difference between quick assets and current assets, non-quick assets, and the calculation of the quick assets ratio. The quick ratio and acid test ratio are explained as liquidity ratios that reveal a company's ability to pay short-term liabilities.
In summary, understanding quick assets and the associated financial metrics is crucial for assessing a company's liquidity and financial health. Investors and analysts use these concepts to make informed decisions about a company's ability to meet its short-term obligations.
