What Are Quick Assets?
Let me explain quick assets directly: these are assets your company owns that have commercial or exchange value and can be easily turned into cash or are already cash. As someone who's analyzed these for years, I can tell you they're the most liquid assets you have, including cash and equivalents, marketable securities, and accounts receivable. You use them to figure out key financial ratios, especially the quick ratio, which helps in making decisions.
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 assets, quick assets are economic resources you can convert to cash quickly without losing much value. Cash and cash equivalents are the most liquid, and I include marketable securities and accounts receivable in this category too. You don't count inventories here because they might take longer to sell. Companies like yours often hold some quick assets as cash or securities to cover immediate needs in operations, investing, or financing. If cash is low, you might use credit lines for liquidity. Depending on your industry, a big chunk of quick assets could be in accounts receivable—think corporate sales versus retail, where receivables might be minimal.
Example of Quick Assets: The Quick Ratio
You most often use quick assets to check if a company can handle its short-term bills due within a year. The quick ratio, or acid test, divides the sum of cash, equivalents, marketable securities, and accounts receivable by current liabilities. This tells you if the company can meet obligations even if revenues slow. Here's the formula: Quick Ratio = (Cash & Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities. Or alternatively: Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities.
Quick Assets Versus Current Assets
Quick assets give you a stricter view of liquidity than current assets because they leave out inventory and other harder-to-sell items. By focusing on the most liquid assets, they show your true short-term position. Compare this to the current ratio, which includes everything in current assets divided by liabilities—it's less stringent. Remember, the term 'quick' comes from Old English meaning 'alive' or 'alert,' which fits how fast these assets move.
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