Quick Assets
Quick assets mean the cash and various other assets which could be or will be converted into cash quite soon like marketable securities, accounts receivable or equivalent current assets minus inventory. This ratio of quick assets to liabilities is referred to as quick ratio or acid test ratio.
The formula for calculating Quick Asset ratio is as follows:
Quick Asset Ratio = Quick Asset / current liabilities.
Let us take an example of ABC Company
Total Short-Term is 50,385
Long-Term Assets is 93,385
Total Short-Term Liabilities is $4,000
Quick Assets is 26,385
Liabilities and Owner’s Equity
Total Liabilities is 23,000
Total Liabilities & Owner’s Equity 93,385
Quick Asset Ratio = Quick Asset / current liabilities
The current ratio for the ABC Company would be 12.6. This is calculated by dividing the Short-Term Assets on December 31, 2010, of $50,385 by the Short- Term Liabilities on the same day of $4,000. Again using the values the quick ratio for the ABC Company would be 6.6. This is calculated by taking the quick Assets on December 31, 2006, of $26,385 and dividing them by the Current Liabilities of $4,000. But what do these numbers mean? Before you can decide whether a firm has sufficient Current Assets or quick Assets to cover their Current Liabilities, you need to know what the current and quick ratios were in the preceding periods. The rule of thumb is that the current ratio should be greater than 2.0. What this means is that the Current Assets available to the company to pay their debts are at least double their Current Liabilities. The quick Asset ratio rule of thumb is that this ratio should be 1.5 or larger. These ratios vary from industry to industry, and therefore your company’s current ratio should not only be compared to prior years and to the rule of thumb figure, but should also be compared to similar companies in the same industry.
In general the larger the current and quick ratios are, the greater the probability that a company will be able to pay its debts in the near term. In the case of the ABC Company, the current and quick ratios are well above the rule of thumb, which means the business is in a very good position to be able to pay its Current Liabilities.
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