Quick Assets: Definition, Formula & Calculation
In accounting, assets are a company’s resources that have value and can serve a future benefit. They’re recorded on the balance sheet as either current or non-current assets.
Current assets are short-term investments that you can convert to cash in a year or less. They’ll be available as working capital for day-to-day operations. The “quick” part of quick assets refers to how quickly or easily they can turn them into cash.
A company might keep some of its assets in another form, where it can’t easily cash out. For example, it might store gold in vaults rather than sell it and deposit the money in an account.
Accounting standards require companies to report valuation of these kinds of assets. This lets investors know what the company’s real exposure is. This article explains what quick assets are, their main types, and how to calculate them.
Table of Contents
KEY TAKEAWAYS
- Quick assets are the most liquid types of assets a company has. They include cash, short-term investments, and any other assets into cash.
- Traditional accounting methods require companies to estimate the value of these types of assets.
- This informs investors of their real exposure.
- Quick assets are often referred to as quick or liquid assets because they can turn into fast cash.
What Are Quick Assets?
Quick assets are a company’s cash and cash equivalents, as well as things that can be easily turned into cash. They’re usually shorter-term cash investments in securities, stocks, or other forms of equity.
Why Are Quick Assets Important?
Quick assets allow a company to have access to its current ratio of working capital for daily operations.
Many companies rely on quick assets to help them get through strained financial periods. For example, a company might use its lines of credit for a quick cash infusion.
You can use this new cash balance for anything from paying employees to purchasing inventory. Quick assets are always current as they can convert to cash in a year or less. But sometimes companies keep some of their assets in an alternate form of cash that cannot easily cash out.
Moreover, these assets cannot convert to cash. Accounting standards and financing requirements dictate companies report the valuation of these assets. This is so investors know what the company’s real exposure is.
When investors know where each source of financing comes from, they can determine the fair market value of your business.
How to Calculate Quick Assets
Quick assets are part of your current assets, like inventory. So you must subtract inventories from current assets to get quick assets.
Moreover, you need quick assets if you want to know your quick ratio. With this, you’ll know whether your company can cover short-term debt using your liquid assets.
You can find this information on your balance sheet assets. It’s found under current assets and liabilities. Using this information is an acid test for your business.
Quick Assets Formula
The formula to calculate quick assets is:
You’re looking for the total cash form that the company has on hand plus any short-term investments (inventory). You then subtract any inventory from your current assets to get your company’s “quick” assets.
The formula for calculating quick ratio is:
To calculate a company’s quick assets, you must gather:
- Its total cash
- Cash equivalents
- Accounts receivable
- Short-term investments
You can find this information on a company’s balance sheet.
For example, assume that ABC Corporation has $100,000 in cash, $200,000 in accounts receivable, and $300,000 in short-term investments. Its quick assets would be $600,000.
The quick ratio is a valuable tool for investors because it can give them an idea of a company’s liquidity. That is, how easily it can pay off its short-term obligations.
A company with a quick ratio of less than 1 may have difficulty paying off its liabilities. A company with a quick ratio of more than 1 should have no problem doing so.
List of Quick Assets
As you compile your list of quick assets, keep in mind that it’s anything you can use to quickly convert to cash and use for day-to-day operations. This might be to purchase inventory or pay bills.
Some quick assets are:
- Cash in bank accounts
- Cash investments
- Marketable securities
- Short-term investments
- Current account receivables
Other types of business assets that are not considered quick assets are things such as:
- Land
- Buildings
- Equipment
- Patents
- Copyrights
- Goodwill
Example of Quick Assets
When it comes to financial analysis, the quick ratio is an important metric to consider. This ratio provides insights into a company’s short-term liquidity, or if it can pay off its short-term obligations.
The quick ratio’s current assets and liabilities give a more accurate picture of a company’s financial health than the current ratio.
While a higher quick ratio is generally better than a lower one, it’s important to put this ratio in context. For example, a company with a very high quick ratio may be holding too much cash on its balance sheet, which could be put to better use.
Likewise, a company with a very low quick ratio may be at risk of defaulting on its obligations. As such, it’s important to consider the quick ratio in conjunction with other financial ratios and metrics.
Summary
As you can see, the quick ratio is a pretty simple calculation. However, it’s also an important one. The quick ratio lets you know how well a company can pay its short-term obligations without having to sell off any of its inventory.
This is important because it gives you an idea of how liquid the company is. A company with a high quick ratio is typically considered to be more liquid than a company with a low quick ratio.
Now that you know how to calculate the quick ratio, you can start using it to analyze companies. Just remember to keep in mind that the quick ratio is just one tool in your financial analysis toolbox.
FAQs About Quick Assets
Quick assets are a type of current asset. All quick assets are current assets, but not every current asset is a quick asset. This is because there are some current assets, like inventory, that can take longer to convert into cash. These are long-term assets.
This is important to know because it will affect how you calculate your company’s quick ratio. Keep reading for instructions to do this.
Non-quick assets are any type of asset that cannot be quickly converted into cash. This might include things like long-term debt obligations, property, and equipment. Non-liquid assets are important to know because they can affect a company’s ability to pay its short-term liabilities.
The quick ratio is an acid test ratio that measures a company’s ability to pay its short-term liabilities with its quick assets.
To calculate the acid test ratio, you must divide a company’s quick assets by its current liabilities. You’re also subtracting prepaid expenses and inventory.
The formula for the acid test ratio is:
Acid Test Ratio = Quick Assets – Prepaid Expenses – Inventory
Both the quick ratio and acid test ratio are liquidity ratios that show if a company can pay its short-term obligations.
Share: