What Are Quick Assets?
Quick assets refer to assets owned by a company with a commercial or exchange value that can easily be converted into cashor that are already in a cash form. Quick assets are therefore considered to be the most highly liquid assets held by a company. They include cash and equivalents, marketable securities, and accounts receivable. Companies use quick assets to calculate certain financial ratios that are used in decision making, primarily the quick ratio.
Key Takeaways
- Current and quick assets are two categories from the balance sheet that analysts use to examine a company’s liquidity.
- Quick assets are equal to the summation of a company’s cash and equivalents, marketable securities, and accounts receivable which are all assets that represent or can be easily converted to cash.
- Quick assets are considered to be a more conservative measure of a company's liquidity than current assets since it excludes inventories.
- The quick ratio is used to analyze a company's immediate ability to pay its current liabilities without the need to sell its inventory or use financing.
The Basics of Quick Assets
Unlike other types of assets, quick assets represent economic resources that can be turned into cash in a relatively short period of time without a significant loss of value. Cash and cash equivalents are the most liquid current asset items included in quick assets, while marketable securities and accounts receivable are also considered to be quick assets. Quick assets exclude inventories, because it may take more time for a company to convert them into cash.
Companies typically keep some portion of their quick assets in the form of cash and marketable securities as a buffer to meettheir immediate operating, investing, or financing needs. A company that has a low cash balance in its quick assets may satisfy its needfor liquidity by tapping into its available lines of credit.
Depending on the nature of a business and the industry in which it operates, a substantial portion of quick assets may be tied to accounts receivable. For example, companies that sell products and services to corporate clients may have large accounts receivable balances, while retail companies that sell products to individual consumers may have negligible accounts receivable on their balance sheets.
Example of Quick Assets: The Quick Ratio
Analysts most often use quick assets to assess a company's ability to satisfy its immediate bills and obligations that are due within a one-year period. The total amount of quick assets is used in the quick ratio, sometimes referred to as the acid test, which is a financial ratio that divides the sum of a company's cash and equivalents, marketable securities, and accounts receivable by its current liabilities. This ratio allows investment professionals to determine whether a company can meet its financial obligations if its revenues or cash collections happen to slow down.
The formula for the quick ratio is:
QuickRatio=CurrentLiabilitiesC&E+MS+ARwhere:C&E=cash&equivalentsMS=marketablesecuritiesAR=accountsreceivable
or
QuickRatio=CurrentLiabilitiesCA−Inventory−PEwhere:CA=currentassetsPE=prepaidexpenses
Quick Assets Versus Current Assets
Quick assets offer analysts a more conservative view of acompany’s liquidity or ability to meetit* short-term liabilities with its short-term assets because it doesn'tinclude harder to sell inventory andother current assetsthat can be difficult to liquidate. By excluding inventory,and other less liquid assets,the quick assets focus on the company’s most liquid assets.
The quick ratio can also be contrasted against the current ratio, which is equal to a company's total current assets, including its inventories, divided by its current liabilities. The quick ratio represents a more stringent test for the liquidity of a company in comparison to the current ratio.
The word quick originates with the Old English cwic, which meant "alive" or "alert."
I've extensively studied financial analysis and liquidity assessment in corporate accounting. The concept of quick assets is pivotal in evaluating a company's immediate financial strength. Quick assets, the most liquid holdings, encompass cash, equivalents, marketable securities, and accounts receivable. This liquidity enables conversion into cash rapidly or is already in a cash form. By excluding inventories, they offer a more cautious estimate of a company's liquidity, as these assets might take longer to convert into cash.
The quick ratio, also known as the acid test ratio, embodies the essence of quick assets in evaluating a company's capability to meet short-term liabilities without relying on inventory liquidation or additional financing. It's calculated by dividing quick assets by current liabilities, serving as a litmus test for a company's immediate solvency.
In financial analysis, the quick ratio often juxtaposes the current ratio. While the current ratio encompasses all current assets, including inventory, the quick ratio zooms in on the most liquid assets, providing a more stringent evaluation of a company's liquidity.
Understanding these concepts is integral to comprehending a company's financial health and decision-making processes. Quick assets, by nature, epitomize agility and readiness, directly impacting a company's ability to respond swiftly to financial obligations.
For the specific terms mentioned:
- Cash and Equivalents: These are readily accessible funds, including actual cash and assets that can be easily converted into cash.
- Marketable Securities: Financial instruments with a high degree of liquidity and low risk, like stocks or bonds, readily tradable in the market.
- Accounts Receivable: Amounts owed by customers for goods or services sold on credit. These represent future cash inflows for the company.
Analyzing the quick ratio equation:
- ( \text{Quick Ratio} = \frac { \text{Cash \& Equivalents} + \text{Marketable Securities} + \text{Accounts Receivable} }{ \text{Current Liabilities} } )
- Alternatively: ( \text{Quick Ratio} = \frac { \text{Current Assets} - \text{Inventory} - \text{Prepaid Expenses} }{ \text{Current Liabilities} } )
The differentiation between quick assets and current assets lies in their inclusivity of inventory. Quick assets offer a more stringent and immediate view of liquidity compared to current assets, which encompass a broader range of assets, including inventory and prepaid expenses.
The etymology of "quick" traces back to Old English, connoting aliveness or alertness. This historical origin subtly reflects the essence of agility and readiness inherent in quick assets.
