Quick assets definition
/What are Quick Assets?
Quick assets are any assets that can be converted into cash on short notice. These assets are a subset of the current assets classification, for they do not include inventory (which can take an excess amount of time to convert into cash). The most likely quick assets are cash, marketable securities, and accounts receivable. Quick assets are not considered to include non-trade receivables, such as employee loans, since it may be difficult to convert them into cash within a reasonable period of time.
A financially healthy business that does not pay dividends may have a large proportion of quick assets on its balance sheet, probably in the form of marketable securities and/or cash. Conversely, a business in difficult circumstances may have no cash or marketable securities at all, instead fulfilling its cash requirements from a line of credit. In the latter case, the only quick asset on the books may be trade receivables.
From a management perspective, it makes sense to keep a substantial amount of quick assets on hand when revenue and profit levels are unstable, so that there are sufficient cash reserves to cover any shortfalls that may arise. Conversely, a highly stable business with predictable cash flows requires far fewer quick assets.
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The Interpretation of Financial Statements
The Quick Ratio
The total of all quick assets is used in the quick ratio, where quick assets are divided by current liabilities. The calculation is as follows:
(Cash and cash equivalents + Marketable securities + Trade accounts receivable) ÷ Current liabilities = Quick ratio
The intent of this measurement is to determine the proportion of liquid assets available to pay immediate liabilities. The quick ratio is typically measured when a lender is evaluating a loan request from a prospective borrower whose financial situation appears to be somewhat uncertain.
Quick Assets vs. Current Assets
Quick assets include any assets that can be converted into cash very quickly. This is not the case for current assets, which also includes inventory. Inventory can be quite difficult to convert into cash in the short term, and so is generally not available for paying off current liabilities. This is especially the case when a business has a large proportion of obsolete inventory, or inventory used as service parts (which tend to sell off over an extended period of time).
All current assets are included in the current ratio, which compares current assets to current liabilities. The inventory differential carries over into this ratio, which is not as useful as the quick ratio for determining the short-term liquidity of a business.