Quick Assets - Explained
What is a Quick Asset?
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Table of ContentsWhat is a Quick Asset?How are Quick Assets Used?About Quick RatioCalculating Quick AssetsAcademic Research on Quick Assets
What is a Quick Asset?
Quick assets refer to assets that a company with an exchange or commercial value can convert into cash quickly, or they are already in cash form. Quick assets are under a subset known as current assets, and they do not include inventory. Note that to convert inventory into cash, you will need time. Therefore, the quick assets are the most highly liquid assets that a company can hold, including accounts receivable and marketable securities. Quick assets, however, do not include non-trade receivables like loans because they are difficult to convert into cash quickly.
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How are Quick Assets Used?
Quick assets are generally different from other types of assets that a business has. It represents those economic resources that you can convert into cash within a relatively short time and with less loss of value. For a business to be able to meet their immediate operating, financing, and investing needs, they usually rely on quick assets which they keep to facilitate this. 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 consist of the following:
- Cash: This include cheques, coins, paper money, money orders, and deposits in banks
- Marketable Securities: This refers to preferred or common stock investments that a company holds in another large corporation.
- Accounts Receivable: These are goods or services received that a customer is yet to pay.
About Quick Ratio
The quick ratio refers to a liquidity ratio that a business uses to compare its quick assets to current assets. For instance, a quick ratio of 5 will mean that a business's current liabilities are twice as many compared to its quick assets. What does this mean to a business? It means that the business will have to sell part of its long-term assets to be able to pay off its current liabilities. Generally, the quick ratio ensures that a business receives cash quickly to pay off its debt. If a company has quick assets, it means that it will be able to settle its debts immediately because such assets are easy to convert into cash. long-term assets take a much longer time to convert into cash.
Calculating Quick Assets
You can construct a quick ratio against the current ratio that equals the total current assets of a company, and this includes the company's inventories. You then divide the results by its current liabilities. You can use the following two formulas to calculate quick assets:
Quick Assets = Cash+Marketable Securities + Accounts Receivable
Quick Assets = Current Assets - Inventories - Prepaid Expenses
Example Lets assume that Company XYZs balance sheet shows cash as well as cash equivalents of $2,219,000, net receivable worth $3,867,000, and short-term investments worth $1,416,000. XYZs company quick assets will be as follows: Quick Asset = $2,219,000 + $1,416,000 + $3,867,000 (7,502,000)
Academic Research on Quick Assets