What are Quick Assets?

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 cash or 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.

Classifying Quick Assets

Contrary to other kinds of assets, quick assets comprise economic resources that can be quickly converted to cash.

Another requirement for an item to be classified as a quick asset is that while converting it to cash, there should be minimal or no loss in value. In other words, a company shouldn’t incur a high cost when liquidating the asset.

It is important to note that inventories don’t fall under the category of quick assets. This is because realizing cash from them takes time. The only way a business can convert inventory into cash quickly is if it offers steep discounts, which would result in a loss of value.

The majority of companies keep their quick assets in two primary forms: cash and short-term investments (marketable securities). By doing so, they hold enough capital to cover their operating, investing, and financing needs.

A company with a low cash balance in its quick assets can boost its liquidity by making use of its credit lines.

A major component of quick assets for most companies is their accounts receivable. If a business sells products and services to other large businesses, it’s likely to have a large number of accounts receivable. In contrast, a retail company that sells to individual clients will have a small number of accounts receivable on its balance sheet.

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Quick Assets Have Two Important Features:

  • They can be converted into cash quickly
  • While converting it to cash, there is minimal or no loss in value.

Thus inventories don’t fall under the category of quick assets. This is because realizing cash from them takes time. The only way a business can convert inventory into cash quickly is if it offers steep discounts, which would result in a loss of value.

Most companies keep these liquid assets in the form of marketable securities or cash. However, companies that have quick assets with low cash balance, usually meet their needs for liquidity using their lines of credits.

A business that is financially healthy, and does not pay its shareholders dividends, has a balance sheet with a large share of quick assets, in the form of cash or marketable securities. On the other hand, a business that is struggling financially in most cases lacks cash or marketable securities. The only quick asset that is likely to have on its books is trade receivables.

A company may use the total amount of all quick assets to calculate the quick ratio. Here it divides quick assets by its current liabilities. The intention of measuring this is for the company to be able to determine its liquid assets proportion so that it can pay immediate liabilities. Investors and analysts also use the quick ratio to evaluate a company’s ability to deal with its short term debt obligation.

Quick Assets Versus Current Assets

Quick assets offer analysts a more conservative view of a company’s liquidity or ability to meet its short-term liabilities with its short-term assets because it doesn’t include harder to sell inventory and other current assets that can be difficult to liquidate. By excluding inventory, and other less liquid assets, the quick assets focus on the company’s most liquid assets.

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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.

Interpreting the Quick Ratio

A high quick ratio is an indication that a company is utilizing its short-term assets effectively to meet its financial needs.

If a company reports an acid test ratio of 1, this indicates that its quick assets equal its existing liabilities. A ratio higher than 1 indicates that the company’s quick assets are more than sufficient to cover liabilities. The company is fully capable of paying current liabilities without tapping into its long-term assets and will still have cash or cash equivalents left over.

Long-term assets are those used to generate revenue. As such, selling those resources would hurt the company’s ability to generate revenue and also indicate that its current activities aren’t creating adequate profits to cover its current liabilities.

As seen in the example above, Ashley’s Clothing Store’s quick ratio is greater than 1. It means that it has enough quick assets to cover all its current liabilities and still has more left.

Conclusion

The quick asset is the number of assets on the Company’s balance sheet, which can be quickly converted into cash without significant losses.

Companies try to maintain an appropriate amount of liquid assets considering the nature of their businesses and volatility in the sector. The quick asset ratio or the acid test ratio is significant for the Company to remain liquid and solvent.