Quick Assets

Quick assets are the current assets a business can convert into cash within a short time, usually 90 days or less, without a significant loss of value. They normally comprise cash and cash equivalents, short-term marketable securities and net accounts receivable. They represent the resources a company could call on at short notice to pay its bills if its normal flow of sales were interrupted.

The idea is used mainly in liquidity analysis. Quick assets form the numerator of the quick ratio, also called the acid-test ratio, which compares them with current liabilities. They are a narrower and more cautious measure than total current assets, which also include stock and prepayments.

The test for including an item is how certain and how fast it turns into cash.

• Cash on hand and in bank accounts is the most liquid quick asset.
• Cash equivalents, such as Treasury bills and money market funds with original maturities of three months or less, are included because they can be cashed with little risk.
• Marketable securities that are actively traded and held for the short term are included at their current market value.
• Accounts receivable are included net of the allowance for doubtful accounts, since only the collectible amount is likely to become cash.
• Inventory is excluded because it must first be sold, often on credit, and may have to be discounted to sell quickly. Work in process and raw materials are even further from cash.
• Prepaid expenses such as insurance or rent paid in advance are excluded because they will be used up rather than converted into cash.

Quick assets can be calculated by adding the qualifying items directly, or by starting from total current assets and subtracting the ones that do not qualify:

Here $\text{Current assets}$ is the total from the balance sheet, $\text{Inventory}$ covers all stock categories and $\text{Prepaid expenses}$ covers advance payments and other current assets that will not become cash. A distributor reports cash of $80,000, marketable securities of $45,000, net receivables of $175,000, inventory of $260,000 and prepaid expenses of $15,000, so total current assets are $575,000. Quick assets are $575,000 minus $260,000 minus $15,000, or $300,000. If current liabilities are $250,000, the quick ratio is 1.2, meaning the company has $1.20 of quickly available resources for each dollar due within a year.

Lenders, suppliers and credit analysts look at quick assets when deciding whether a business can meet short-term obligations. A retailer may have plenty of total current assets, but if most of them are inventory, its quick assets may cover only a fraction of what it owes. Comparing quick assets with the current ratio and with working capital shows how much a company's liquidity depends on selling stock.

The measure has limits. Receivables may be slow or doubtful even after the allowance, and some cash may be restricted, for example held as collateral, and therefore not truly available. Quick assets are also a snapshot at the balance sheet date and can be flattered by timing, such as delaying supplier payments over a year end. What counts as a normal level varies by industry: software businesses often hold large quick assets, while supermarkets operate safely with few because their stock sells within days.