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聽or that are already in a cash form. Quick assets are therefore considered to be the most highly 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.

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Quick Assets

The Basics of Quick Assets

Unlike other types of , 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 meet聽their immediate operating, investing, or financing needs. A company that has a low cash balance in its quick assets may satisfy its need聽for 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.

Key Takeaways

  • Current and quick assets are two categories from the balance sheet that analysts use to examine a company鈥檚 liquidity.
  • Quick assets are equal to the summation of a company鈥檚 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.

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:

Quick聽Ratio=C聽&聽E+MS+ARCurrent聽Liabilitieswhere:C聽&聽E=cash聽&聽equivalentsMS=marketable聽securitiesAR=accounts聽receivable\begin{aligned} &\text{Quick Ratio} = \frac { \text{C \& E} + \text{MS} + \text{AR} }{ \text{Current Liabilities} } \\ &\textbf{where:} \\ &\text{C \& E} = \text{cash \& equivalents} \\ &\text{MS} = \text{marketable securities} \\ &\text{AR} = \text{accounts receivable} \\ \end{aligned}Quick聽Ratio=Current聽LiabilitiesC聽&聽E+MS+ARwhere:C聽&聽E=cash聽&聽equivalentsMS=marketable聽securitiesAR=accounts聽receivable

or

Quick聽Ratio=CAInventoryPECurrent聽Liabilitieswhere:CA=current聽assetsPE=prepaid聽expenses\begin{aligned} &\text{Quick Ratio} = \frac { \text{CA} - \text{Inventory} - \text{PE} }{ \text{Current Liabilities} } \\ &\textbf{where:} \\ &\text{CA} = \text{current assets} \\ &\text{PE} = \text{prepaid expenses} \\ \end{aligned}Quick聽Ratio=Current聽LiabilitiesCAInventoryPEwhere:CA=current聽assetsPE=prepaid聽expenses

Quick Assets Versus Current Assets

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