11 Jun Quick Assets
What are Quick Assets?
Definition: Quick assets are those current assets that can quickly be converted into cash. This classification includes cash, cash equivalents, marketable securities, and receivables. It’s important to remember that inventories are not quick assets.
What do Quick Assets mean?
The amount of quick assets that a company carries on its balance sheet tells analysts how easily it could pay off its current liabilities. To be classified in this category, an asset must meet two conditions:
⇨ It should be easy to convert it into cash. Cash equivalents, which include short-term investment securities that have a high credit quality, fall into this group. So do government bonds and certificates of deposit.
⇨ At the time of conversion into cash, there should be a minimal loss in value. If there is a significant cost involved in liquidating an asset, it cannot be considered to be a quick asset.
Inventories are not considered quick assets because converting them into cash may take time. It is also possible that a discount may have to be offered to persuade buyers to make the purchase.
In fact, quick assets are a subset of current assets because they exclude inventories.
Quick assets = Current assets – inventories.
The quick asset ratio, which is also known as the acid test ratio, is used to determine the ability of a company to pay off its short-term creditors. It is computed by dividing quick assets by current liabilities. The current ratio of a company is computed in a similar manner. The only difference is that the numerator includes inventories.
So, if a firm’s quick asset ratio is lower than its current ratio, it signifies that the current assets are dependent on inventories.
Example of Quick Assets
Grenshaw Plastic Corporation’s balance sheet reveals the following data:
⇨ Cash: $180,000
⇨ Marketable securities: $300,000
⇨ Receivables: $2,320,000
⇨ Inventories: $1,800,000
The company has quick assets of a value of $2.8 million ($180,000 + $300,000 + $2,320,000). Inventories do not form part of quick assets.
Quick assets provide information about a company’s ability to convert assets into cash. The quick ratio is a useful tool to understand if the firm has the ability to meet its short-term debt obligations from the resources that are available with it.