Quick Assets
Current and quick assets are two categories from the balance sheet that analysts use to examine the company’s liquidity. Quick assets refer to those assets which are owned by a company and can be converted into cash easily in a short period of time. It can also be referred to those assets which are already in the cash form. Quick assets, therefore, are considered the most liquid assets. They include cash, marketable securities, and accounts receivable.
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As current assets include inventories, they are not a conservative measure to determine a company’s liquidity but instead, quick assets are. Cash and cash equivalents are more liquid compared to marketable securities and accounts receivables. In order to meet immediate financial, investing and operational needs companies typically keep a certain portion of cash and marketable securities as a buffer.
How is it calculated?
They are a part of current assets which include inventories thus,
QUICK ASSETS = CURRENT ASSETS – INVENTORY
Quick assets are used to calculate the quick ratio. It is used to determine a company’s financial expenses in the short run by utilizing the company’s liquid assets. It is also called the ACID TEST.
QUICK RATIO =CASH AND CASH EQUIVALENTS + SHORT TERM INVESTMENTS + ACCOUNTS RECEIVABLE/EXISTING LIABILITIES
OR
QUICK RATIO = CURRENT ASSETS – INVENTORY / CURRENT LIABILITIES
Each component needs to be found out from the balance sheet and needs to be substituted in the formula to find the quick ratio.
Example
The balance sheet of ABC company is as follows-
Cash – $10000
Marketable securities – $32000
Accounts receivable – $12000
Prepaid expense – $3000
Current liabilities – $40000
Quick ratio = (cash+ marketable securities + accounts receivables + prepaid expenses)/current liabilities
= (10000 + 32000 + 12000 + 3000)/40000
= 1.42
Since the ratio is greater than 1 the company has sufficient liquidity to pay off the liabilities. Only if the ratio would have been below 1 the company would have to think about the liquidity of the assets in order to pay off current liabilities.
Interpretation:
Quick assets are used by financial analysts to measure the liquidity of the company in the short term. Companies keep some cash, marketable securities, and other assets to maintain liquidity in the short run based on their line of operation. If a company has to keep a large number of these assets then it signifies that the company is not using its resources efficiently.
The quick ratio is the acid test in finance which tests the company’s abilities to convert the quick assets into cash to pay off the current liabilities. If it is 1 then the company’s quick assets are equal to its current liabilities. If it is higher than 1 then it indicates that the company has more than enough quick assets to pay its current liabilities.
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Conclusion:
According to the nature of the business and the volatility in the sector the companies try to maintain the appropriate amount of liquid assets. The quick ratio is very important in order for companies to stay solvent and liquid. Analysts and business managers regularly check and maintain the quick ratio to meet the company obligations and provide returns to the shareholders.
Author -Sanjana Rau
About the author- Started my journey of self even when the odds were against me, keen observation, a cool temper, and sports worked the best for me.
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