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Quick Assets Definition

The total value of Nike, Inc.’s quick assets is $17,939,000 as of May 31, 2021. This figure is calculated by adding cash and equivalents, short-term investments, and accounts receivable. Companies tend to use quick assets to cover short-term liabilities as they come up, so rapid conversion into cash (high liquidity) is critical. Inventories and prepaid expenses are not quick assets because they can be difficult to convert to cash, and deep discounts are sometimes needed to do so. For instance, if the company had to pay off its debt immediately, how fast could it come up with the money? If the company had a large amount of quick assets, it would be able to pay its debts much faster than if it had to sell off long-term assets.

  • Companies maintain quick assets per the requirement and industry in which they operate.
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  • Quick assets, however, do not include non-trade receivables like loans because they are difficult to convert into cash quickly.
  • Quick assets are therefore considered to be the most highly liquid assets held by a company.

It also helps investors and creditors assess the risk and profitability of a company. Some inventory items are also considered quick assets, especially if they are in high demand and have a low cost of production. Your quick assets as a bakery owner would be the bread and pastries, as they can be sold quickly and created at a low cost. Generally speaking, a quick ratio between 1 and 2 is considered healthy for most businesses. Calculating the quick ratio for your business to ensure it has enough liquidity to operate is worthwhile.

More from Merriam-Webster on quick assets

They’re recorded on the balance sheet as either current or non-current assets. When calculating the ratio, the first thing you need to do is look for each component in the current liabilities and current assets section of the balance sheet. A company with a low cash https://www.wave-accounting.net/ balance in its quick assets can boost its liquidity by making use of its credit lines. Quick assets are those owned by the company that can be easily and quickly converted into cash. They help meet the company’s short-term liabilities as and when they are due.

  • The quick ratio can also be contrasted against the current ratio, which is equal to a company’s total current assets, including its inventories, divided by its current liabilities.
  • Cash equivalents are often an extension of cash as this account often houses investments with very low risk and high liquidity.
  • The quick ratio represents a more stringent test for the liquidity of a company in comparison to the current ratio.

The quick ratio has the advantage of being a more conservative estimate of how liquid a company is. Compared to other calculations that include potentially illiquid assets, the quick ratio is often a better true indicator of short-term cash capabilities. The total accounts receivable balance should be reduced by the estimated amount of uncollectible receivables.

What Happens If the Quick Ratio Indicates a Firm Is Not Liquid?

You’re looking for the total cash form that the company has on hand plus any short-term investments (inventory). You then subtract any inventory from your current assets to get your company’s “quick” assets. With this, you’ll know whether your company can cover short-term debt using your liquid assets. Current assets are short-term investments that you can convert to cash in a year or less. The “quick” part of quick assets refers to how quickly or easily they can turn them into cash. The quick ratio indicates the company’s capacity to deal with any emergency.

Calculation of Quick Ratio

By measuring its quick ratio, a company can better understand what resources they have in the very short-term in case they need to liquidate current assets. Though other liquidity ratios measure a company’s ability to be solvent in the short-term, the quick ratio is among the most aggressive https://accountingcoaching.online/ in deciding short-term liquidity capabilities. The quick ratio looks at only the most liquid assets that a company has available to service short-term debts and obligations. Liquid assets are those that can quickly and easily be converted into cash in order to pay those bills.

More about quick assets

As the quick ratio only wants to reflect the cash that could be on hand, the formula should not include any receivables a company does not expect to receive. Quick assets are more liquid than current assets since they do not include inventory and prepaid expenses. The quick ratio or acid test ratio compares the quick assets of a company to its current liabilities. In businesses with unstable revenue and profit levels, keeping a large reserve of quick assets helps to cover any shortfalls. In contrast, businesses with stable cash flows may be able to maintain a good financial standing even with lesser quick assets on hand.

Calculating Quick Assets and Quick Ratio

This is because there are some current assets, like inventory, that can take longer to convert into cash. A major component of quick assets for most companies is their accounts receivable. If a business sells products and services https://accounting-services.net/ to other large businesses, it’s likely to have a large number of accounts receivable. In contrast, a retail company that sells to individual clients will have a small number of accounts receivable on its balance sheet.

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A company’s capacity to satisfy its immediate financial obligations is shown by its quick assets, sometimes called liquid or current liquid assets. On the balance sheet, deduct prepaid expenses from current assets to arrive at quick assets. Cash on hand, short-term investments, and accounts receivable are a few examples of fast assets. Sometimes a well-established business may go through unpredicted cash flow issues. This situation may be because of a shutdown of business for a few days or a customer delaying payment.

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