Definition of Quick Assets
Quick assets are those assets owned by the company which can be easily and quickly converted into cash. They help in meeting the short-term liabilities of the company as and when they are due. They are taken as most liquid assets in the business and include cash and cash equivalents, marketable securities, and accounts receivable. Quick assets are used for calculating various financial ratios by the organizations that vouch for their financial health as well as working capital.
Assets can be easily and quickly converted into cash without incurring high costs for their conversion are accounted for as quick assets. The period in which they can be converted into cash is generally less than a year.
Quick assets generally do not include inventory because the conversion of inventory into cash takes time. Though there are ways in which businesses can quickly convert inventory into cash by providing steep discounts, but this would result in high cost 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 their quick assets such as cash and short-term investments to meet their operating, investing, and financing requirements.
How to Calculate Quick Assets?
Quick assets form part of the current assets and current assets include inventories as well. Therefore, to calculate the quick asset, inventory needs to be excluded or deducted from the value of the current assets.
Current Assets = Cash and Cash Equivalent + Account Receivable+ Short-Term Marketable Investments
Examples of Quick Assets
Let’s take an example to understand the calculation of Quick Assets in a better manner.
ABC company’s balance sheet provides the following data. Let us see how we can calculate the value of quick assets.
Quick Assets is calculated using the formula given below
Quick Assets = (Account Receivable + Cash + Short-Term Marketableinvestments)
- Quick Assets = ($200,000 + $150,000 + $400,000)
- Quick Assets = $750,000
Remember, inventory does not form part of quick assets.
A company’s balance sheet provides the following information and we need to calculate the value of quick assets.
- Current assets: $200,000
- Inventory: $40,000
- Pre-paid expenses: $10,000
Quick Assets is calculated using the formula given below
Quick Assets = Current assets – Inventories – Pre-Paid Expenses
- Quick Assets = ($200,000 – $40,000 – $10,000)
- Quick Assets = $150,000
Thus, the value of quick assets can be derived by directly reducing the value of inventory and pre-paid expenses from the current assets.
List of Quick Assets
Following assets are considered as most liquid assets or Quick Assets:
- Cash: Cash held by the company at the bank or other interest-bearing accounts like fixed deposits or recurring deposits.
- Accounts Receivable: Amount due to be received from customers against the goods and services supplied to them.
- Marketable Securities: Investment securities that are easily traded in the secondary market and can be converted in to cash easily at the quoted price.
- Short-Term Investments: Stock, bonds, and other securities investments that are expected to be realized in a year and are liquid in nature.
Difference Between Quick Assets and Current Assets
Difference between quick assets and current assets can be well understood from the following table:
|Quick Assets||Current Assets|
|Quick assets don’t include inventoryand prepaid expenses as they cannot be converted in to cash easily.||Current assets include inventory and prepaid expenses as well along with other liquid assets.|
|Quick assets are not shown as a separate head in the statement of financial position.||Current assets are shown as a separate head in the statement of financial position.|
|Liquid assets or quick assets help in calculating the quick ratio for the company.||Current assets help in calculating the current ratio for the company.|
|In the practical world, liquid or quick assets are considered as most liquid assets and can be quickly converted into cash in comparison to current assets.||In the practical world, current assets are considered as less liquid than quick assets as it takes time to convert a few components of current assets into cash.|
Quick assets are advantageous in the following ways:
- They are highly liquid, therefore, are very helpful in meeting short-term liabilities of the organization.
- They serve as a source of financing for buying out new investments without relying on other lines of credit.
- They carry lower risk in comparison to non-liquid assets.
- They represent the strong financial health of the business which helps investors in their decision of investment in the business.
There are some limitations concerned with quick assets:
- Holding too many quick assets will lead to loss of opportunity cost as these assets do not earn much interest, sometimes they do not pay any interest at all.
- A highlevel of quick assets means that the business is risk-averse and is not investing in new ventures which could create a negative reputation in the investor’s eyes.
- Holding too much liquid assets also leads to tax liability as liquid assets are taxed differently than non-liquid assets to promote investments.
Quick assets form an integral part of a company’s liquidity and serve as an indicator of short-term financial health. Companies maintain quick assets as per the requirement and industry in which they are operating in. Business managers should keep a balance between holding an appropriate level of quick assets in a manner that they do not sacrifice a lot on opportunity cost.
This is a guide to Quick Assets. Here we discuss how to calculate Quick Assets along with practical examples. You may also look at the following articles to learn more –