What are quick assets?

Quick assets are used to calculate the quick ratio, which is a key metric used to assess a company’s ability to pay its short-term obligations. The quick ratio is calculated by dividing quick assets by current liabilities. The first one uses only cash and equivalents, short-term investments, and accounts receivable in the numerator. While the second formula subtracts inventories and prepaid expenses from current assets. They can also provide businesses with a cushion against short-term financial instability.

Marketable securities are unrestricted short-term investments that can be easily sold, if needed. They are highly liquid because they can be converted to cash quickly, without losing any of their value. On the other hand, cash equivalents are short-term, highly liquid investments that are readily convertible into cash.

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What are Quick Assets?

The quick ratio measures a company’s ability to pay its short-term liabilities when they come due by selling assets that can be quickly turned into cash. It’s also called the acid test ratio, or the quick liquidity ratio because it uses quick assets, or those that can be converted to cash within 90 days or less. This includes cash and cash equivalents, marketable securities, and current accounts receivable. Quick Assets are all of a business’s current assets that can be converted into cash within a short period of time, typically 90 days.

A quick ratio below 1 shows that a company may not be in a position to meet its current obligations because it has insufficient assets to be liquidated. This tells potential investors that the company in question is not generating enough profits to meet its current liabilities. A company’s quick ratio is a measure of liquidity used to evaluate its capacity to meet short-term liabilities using its most-liquid assets. A company with a high quick ratio can meet its current obligations and still have some liquid assets remaining. Quick assets are a company’s current assets which can quickly be converted into cash.

Components of the quick ratio

While they can provide some advantages such as budgeting and cost savings, it’s important to understand how they fit into your business accounting and financial statements. Prepaid expenses help businesses plan their budgets better since they know what their future obligations will be ahead of time. This knowledge allows companies stationery is an asset or an expense to make more informed procurement decisions based on their current cash flow and projected revenue streams. For example, the current ratio is great at giving high ratio scores for companies with large inventories. On the other hand, the quick ratio leans more conservatively, especially for inventory-reliant business models.

The term quick assets refers to balance sheet accounts that can be monetized quickly in the event of a liquidity crisis. These are also called current assets or cash and marketable securities because they can be quickly turned into cash and used for day-to-day expenses or other short-term needs. Quick assets generally do not include inventory because converting inventory into cash takes time. Though there are ways in which businesses can quickly convert inventory into cash by providing steep discounts, this would result in high costs for the conversion or loss of value of the asset. Similarly, pre-paid expenses are also excluded from the calculation of quick assets since their adjustment takes time and they are not convertible in cash. Companies use quick assets, such as cash and short-term investments, to meet their operating, investing, and financing requirements.

What is a good quick ratio?

Companies use quick assets to calculate certain financial ratios that are used in decision making, primarily the quick ratio. On the contrary, a company with a quick ratio above 1 has enough liquid assets to be converted into cash to meet its current obligations. “It’s the company’s ability to pay debt due soon with assets that quickly convert to cash. You can use the quick ratio to determine a company’s overall financial health.” Quick assets include any assets that can be converted into cash very quickly. Inventory can be quite difficult to convert into cash in the short term, and so is generally not available for paying off current liabilities.

GAAP requires that current assets or quick assets be separated from long-term assets on the face on the balance sheet. This gives investors and creditors insight as to how liquid the company is. In other words, investors and creditors can see how easily current liabilities can be paid.

The Quick Ratio vs. The Current Ratio

Download our FREE whitepaper, Use Financial Statements to Assess the Health of Your Business, to learn about the three financial statements you should be keeping an eye on. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. To illustrate, below is an example of Nike Inc.’s balance sheet as of May 31, 2021. Some examples of marketable securities are stocks, bonds, ETFs, and preferred shares.