Definition
Quick assets refer to the assets owned by a company that can be quickly converted into cash. These assets typically include cash itself, marketable securities, and accounts receivable. They are considered highly liquid and are used to evaluate a company’s short-term financial health or liquidity.
Key Takeaways
- Quick assets, also known as acid-test assets, are short-term assets that can be quickly converted into cash or are already in cash form. They typically include cash, marketable securities, and accounts receivable.
- They are critical to assess a company’s short-term liquidity position and its ability to pay off its current liabilities without relying on the sale of inventory. This assessment is done using the quick ratio or acid-test ratio.
- The level of quick assets a company needs varies by industry. Businesses in industries with slower inventory turnover ratios may require more quick assets than those with faster turnover rates. Sometimes low quick assets indicate financial problems, but not always.
Importance
The term “Quick Assets” is crucial in finance because it helps to measure a company’s short-term liquidity position, meaning its ability to cover its current liabilities without selling inventory or resorting to long-term assets.
This includes assets such as cash on hand, marketable securities, and accounts receivable.
Therefore, a higher value of quick assets indicates a strong financial position, reflecting that the company can quickly convert these assets into cash to pay off its current liabilities.
Hence, investors and creditors often look at the quick ratio (quick assets divided by current liabilities) as a reliable indicator of a company’s financial health in the short term.
Explanation
The primary purpose of quick assets is to provide a clear measurement of a company’s immediate liquidity and financial health. The tally of quick assets includes those that can be converted into cash readily or are in cash already, namely money market funds, accounts receivables, and short-term investments.
These assets are integral to a company’s ability to continue its operations without any hitch during a financial crunch. Additionally, these provide crucial understanding to investors, or lenders about the company’s ability to cover liabilities and debts in the short-term without the need to sell long-term assets.
Moreover, the concept of quick assets is often used in calculations of various financial ratios. A common usage would be the quick ratio or acid-test ratio, which is used to assess a company’s short term liquidity by measuring the dollar amount of liquid assets available for each dollar of current liabilities a company has on hand.
This allows stakeholders to evaluate how well a company could meet its short-term financial obligations without needing to rely on sales of inventory. By excluding inventory from the calculation, quick assets offer a stringent review of a company’s immediate financial strength.
Examples of Quick Assets
Cash on Hand: A company’s physical money, including currencies, bank notes, coins, or money deposited in savings or checking accounts, are the most liquid form of assets and can be termed as quick assets.
Marketable Securities: These include investments like bonds, stocks, debentures that can easily be converted to cash at their present market price. For example, if a company has invested in stocks of another organization which are trading in the stock exchange, they can be sold quickly for cash, hence they count as quick assets.
Accounts Receivable: This is the money owed to a company by its customers for goods or services provided on credit. For instance, if The Amazon Company sold products to customers on credit, the money it should receive in the future would be considered a quick asset because it can be converted into cash within a specified period, i.e., usually within one fiscal year or operating cycle.
FAQs about Quick Assets
What are quick assets?
Quick assets refer to those assets of a company that can be converted into cash quickly. They include cash and cash equivalents, short-term investments, and current receivables.
Why are quick assets important in finance?
Quick assets are important as they are a measure of a company’s short-term liquidity. They are key indicators of a company’s financial health and ability to meet its short-term financial obligations.
How are quick assets different from current assets?
While both quick and current assets are used to measure a company’s liquidity, the key difference lies in their convertibility into cash. Quick assets exclude inventory and prepaid expenses, which cannot be converted into cash as quickly as the other assets.
How to calculate quick assets ratio?
Quick assets ratio, also known as the acid-test ratio, can be calculated by dividing quick assets by current liabilities.
What does a higher quick assets ratio indicate?
A higher quick assets ratio indicates better short-term financial strength. It suggests that a company has enough assets which can be quickly converted to cash to clear its immediate debts.
Related Entrepreneurship Terms
- Current Assets
- Liquid Assets
- Short-Term Investments
- Accounts Receivable
- Cash and Cash Equivalents
Sources for More Information
- Investopedia: This site is a reliable source for finance and investing terms. They have detailed definitions and explanations for most finance terminologies, including Quick Assets.
- Corporate Finance Institute (CFI): CFI offers a variety of free resources regarding finance and accounting terms, including articles and guides about Quick Assets.
- Accounting Tools: This site is a valuable resource for people interested in accounting and finance. They provide in-depth information and clarification about Quick Assets and other related topics.
- The Balance: The Balance is a reputable source for personal finance and money management tips. The site has extensive content about different finance concepts, including Quick Assets.
