What are Quick Assets?
Quick Assets refers to the Assets which are liquid in nature and can be easily converted into Cash by liquidating the same in the market like FD’s, Liquid Funds, marketable securities, Bank Balances, etc and form an essential component in the financial ratio analysis of the company to showcase strong working capital
These assets can be converted to cash quickly, and there is no substantial loss of value while converting an asset into cash. By quickly, it means that assets can be converted to cash in a year or less. Companies manage such assets prudently to remain solvent and liquid.
Quick Assets Formula
The formula is straightforward, and it can be calculated by subtracting inventory from the current assets.
Quick Assets Formula = Current Assets – Inventory
List of Quick Assets
source: Starbucks SEC Filings
These are found on the balance sheet of the Company, and it is the sum of the following list of quick assets:
#1 – Cash
Cash includes the amount kept by the Company in bank accounts or any other interest-bearing accounts like FDs, RDs, etc. Cash and Cash Equivalents in Starbucks were at $2,462.3 in FY2017 and $2,128.8 million in FY2016
#2 – Marketable Securities
There are liquid securities openly traded in the market. Such securities can be easily sold at the quoted price in the market and converted to cash.
#3 – Accounts receivables
Account receivables are the amount the Company is still to receive from the goods and services they have provided to its customers. The Company has already given the services, but they are yet to receive the payment. Hence the Company files it as an asset in the accounts book. Account receivables should be determined properly, and only those amounts should be added if the receivables can be collected within one year or less. Uncollectible, stale receivables, or long-term receivables generally for Companies in construction business should not be added for calculating quick assets.
Accounts Receivables in Starbucks increased to $870.4 million in FY2017 as compared to $768.8 million in FY2016.
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#4 – Prepaid expenses
Prepaid expenses are the expenses the Company has already paid, but it is yet to receive the service. Such services should be consumed within one year to be added to the calculation. Prepaid expenses could be rent expense.
Prepaid expenses and other current assets in Starbucks were at $358.1 million in FY2016 and $347.4 million in FY2016.
#5 – Short-term investments
Short-term investments are investments made by the Company, which is expected to convert into cash within one year. These generally consist of stocks, bonds, and other securities, which can be liquidated quickly and as and when required. Short-Term Investments in Starbucks were $228.6 million in FY2017 and $134.4 million in FY2016.
Inventory is not added in the calculation because inventories can take a longer period to be sold and then converted to cash. Inventories do not have a stipulated period; hence, we remove them while calculating the accounts receivables.
Quick Assets Examples
A Company XYZ has $ 5000 as cash, $ 10000 as marketable securities, and $ 15000 as accounts receivables, which will be received in 2 months. What are the total liquid assets of the Company?
- Quick assets Formula = Cash + Marketable Securities + Accounts Receivables = 5000 + 10000 + 15000 = $ 30,000
A Company MNP has $ 50000 of current assets with $ 30000 as inventories. What is the value of the quick assets on the Company’s balance sheet?
- QA = Current assets – Inventories
- QA = 50000 – 30000 = $ 20000
These are used by analysts to measure the liquidity of a Company in the short term. The Company, based on its line of operations, keeps some of the assets in the form of cash, marketable securities, and other asset forms to maintain its liquidity needs in the short term. A vast amount of such assets than required in the short term may imply the Company is not using its resources effectively. Small QAs or smaller than the liabilities arising in the short term means that the Company may require additional cash to meet its demand.
How do Financial Analysts use it?
To compare the two Companies – financial analysts use quick assets ratio or acid test ratio. It is called the acid test ratio with reference to an acid test done by the gold miners in ancient times. The metal mined from the mines was put to an acid test, whereby if it failed from corroding from the acid, then it is a base metal and not gold. If the metal passed the test, it was considered gold.
Thus, the quick ratio is considered an acid test in finance, where it tests the Company’s ability to convert its assets into cash and pay off its current liabilities.
The quick ratio is calculated by dividing it by current liabilities.
Quick Assets ratio = (Cash + Cash equivalents + Short-term investments + Current receivables + prepaid expenses)/ Current liabilities
Most Companies use long-term assets to generate revenue; hence, it would not be prudent for the Company to sell off long-term assets to meet current liabilities. Thus, a quick ratio puts the Company’s finances to test its ability to meet its current liabilities.
As compared to its Peers, Colgate has a very healthy quick ratio. While Unilever’s Quick Ratio has been declining for the past 5-6 years, we also note that the P&G Quick ratio is much lower than that of Colgate.
Quick Assets Ratio Example
Let us consider the following example to measure quick ratio:
The balance sheet of a Company XYZ is as follows:
- Cash: $ 10000
- Accounts receivables: $ 12000
- Inventory: $ 50000
- Marketable securities: $ 32000
- Prepaid Expenses: $ 3000
- Current liabilities: $ 40000
Thus, quick ratio = (Cash + Accounts receivables + Marketable securities + Prepaid Expenses)/ Current liabilities
- quick ratio = (10000 + 12000 + 32000 + 3000)/40000
- quick ratio = 57000/40000 = 1.42
Higher the quick ratio is more favorable; it is for the Company as it shows the Company has more liquid assets than the current liabilities. A ratio of 1 indicates the Company has just sufficient assets to meet the current liabilities. In contrast, the ratio of less than 1 indicates the Company may face liquidity concerns in the near term.
The quick asset is the amount of assets on the Companies balance sheet, which can be converted into cash quickly without any significant losses. Companies try to maintain an appropriate amount of liquid assets considering the nature of their businesses and volatility in the sector. Quick asset ratio or the acid test ratio is significant for the Company to remain liquid and solvent. Analysts and business managers maintain and monitor the ratio so they can meet the Company’s obligations and provide rethe turn to shareholders/investors.
Quick Assets Video
This article has been a guide to what are Quick Assets. Here we provide its formula to calculate quick assets along with examples and list of items included. We also discuss how Quick Assets Ratio is used by Financial Analysts. You may learn more about Basics of Accounting from the following articles –