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“Everyone hi welcome to the channel nof wallstreetmojo. Watch. The video till. The end.
Also also if you are new to this nchannel. Then you can subscribe us by clicking bell icon ntoday. We have a topic with us is quick assets let s try and understand this in na complete detail format. Now what quick assets are all about see quick assets nare from the name itself you know it simply imply that you know any assets.
Nthat can be converted to the first cash quickly any asset that can be converted nto the cash quickly is called quick asset. So there should be no substantial nloss of the value while converting an asset into cash by quickly it means that nyou. Know as it can be converted to cash you know year or a less period of time nbut. The companies they manage their quick assets fluently to remain solvent nand liquid.
Now what exactly is the formula for this particular thing nbut. The quick acid formula is very simple and it can be calculated by nsubtracting the inventory and the current asset so the formula of the nquick assets qa is equal to your current asset less inventory inventory know nthere are some list of quick assets that are found in all in the balance sheet. Nthe company is the sum of the following like the cash. Marketable securities.
Naccount receivables. Prepaid expenses and taxes you know then there is short term ninvestments. We ll try and discuss each and every see if you talk about cash ncash. Includes the amount that has been kept by the company in the bank.
Accounts. Nit is kept in the bank accounts of any other interest bearing accounts like nfds rds. And so on and so forth or the cash in cash occurrence in starbucks. It nincludes ever they were closely 2460 dollars in financial n2017 and 2182 millions in financial year 16.
This one nis in 17. And this one was in 16 next is marketable securities. If they are like nyou know a liquid securities open it rate in the market. So such securities ncan be easily be sold at a quoted price in the market and that can be converted nthen.
There is a thing called account receivables. The account receivables are nthe amount the company. There is is still to receive still to receive from the ngoods and services. They have provided to its customers.
The company has already ngiven the service..
But they are yet to receive the payment nhence. The company you know the company files its assets in its accounts book. So naccount receivable should be determined properly and only those amounts should nbe added or if the receivables can be collected within one year or less. So nuncollectible.
No stay receivables or long term receivables generally for ncompanies in construction business. It should not be added back or it should nnot be added for the calculating the quick assets. Now. The account receivables nin.
Starbucks has increased closely to 870 million in financial year n2017 as compared to 7688 million in financial year n2016 okay the next is prepaid expenses. Nprepaid expenses are the expenses. The company has already paid. But is yet to nreceive the service.
So such services should be consumed within 1 year to be nto be added with to its calculation. So prepaid expenses could be like you nknow rent expenses so prepaid expenses and other current assets in starbucks nwere closely at 358 million. And the last one was is is the short of ninvestments. See short term investments are the investment that is made by the ncompany.
Which is which is expected to be converted into cash within 1 year of ntimespan so this this generally consists of stocks bonds you have if any than nother securities. Which can be liquidated quickly and as and when the required nshort of investments in starbucks that were to. 286. Million nin 2017 and 1304 million in financial year 2016.
So ninventory is not added in the quick assets calculation. Because inventories ncan take a longer time period to be sold and then converted into thing called ncash so inventories do not have a stipulated timeframe within. Which and nhence you know we remove them while calculating the account receivable. Now nwe will try and get into the example part to understand the quick assets.
Nlet s say. There s a company called xyz. Which has a cash of 5000 let s nsay. This is your cash.
The marketable securities. That is standing at 10000 dollars and the account receivable is standing at 15000. Which will be received in 2 months of time frames. So what are nthis total liquid assets or to company.
See the quick assets formula is equal to nyour cash..
Plus. Marketable securities right. Plus. Accounts receivables that is n30000.
Now. There is example number two a company. Called m p. That has nlet s say 50000 of its current assets.
With inventory. That is standing nat. Let s say. Thirty thousand.
So. What is the value quick asset on the company s balance. Sheet so that is the. Current assets nless.
The current liability that is. 50000. 30000 that s n20000. So these are used by the analyst to measure the liquidity.
The ncompany in short term. So the company based on its line of the operations. They nkeep. Some of the assets in the firm of cash.
Marketable securities and other nquick assets that firms to maintain its liquidity needs in the short huge amount nof such assets. Then required is the short term and we may imply. No company nis not using its resources affect small q is are smaller than the liabilities narising in the short term that means that no company may require additional ncash to meet its demand now i want to make you understand how this quick. Nassets ratio is used by differential and well to compare the two companies.
The nfinancial analysts use the quick asset ratio or the asset test ratio so the nquick asset ratio is called the asset test ratio with reference to the asset ntests done by the gold miners in the ancient. Times the metal mined from the nmines was put to the acid test whereby. It is it failed from all crowding from nthe asset. Then it is based metal and not gold.
If the metal passed a test it nwas considered as gold so the quick ratio is considered as the acid test in ndifference where it tests. The company s ability to convert its assets into the ncash and pay off its current liability. So the quick asset ratio is calculated nsomething like this the. Q.
A is equal to u cash. Plus. Cash and cash equivalents. Nright.
Plus. Any short term investments. Plus. The current receivables plus.
The nprepaid expenses and this whole is divided by the current liability. So most nof. The companies you know you used long term assets to generate revenue hence. It nwould be it would not be prudent for the company to sell off the long term assets.
Nto. Meet the current liabilities. So. Does a quick ratio puts a company s finance.
Nto test its ability to meet its current liabilities right. Now on a quick note ni. ll take one example to wrap this thing up let s say you are holding cash that nis 10000. You have account receivable that is standing at 12000.
Inventory at let s. Say. 50000. Marketable.
Security. 32000 nprepaid. Expenses as 3000 and current. Liability.
Cl and nlet..
s. Say 40000. So this the quick ratio is what your cash right. Plus.
Nthe. Account. Receivable. Plus.
The marketable securities right that was 30 nmm and the prepaid. Expenses that is three thousand this hold 57000 divided by. 40000 that gives us 142. So higher the quickly nratio more favorable for its companies.
And as it is shown the company has more nliquid assets than its current liability. He ratio of one you know it. Indicates. Nthe company has just sufficient assets to meet the current liabilities.
Whereas. Nthe ratio of less than one indicates. That the company may face. A liquidity nconcerns in the near term.
So what are the conclusions in this. See the quick. Nassets is the amount of the assets or the company s balance sheet. Which can be nconverted into cash.
Very quickly without any major losses and you know companies nthey try to maintain an appropriate amount of the liquid assets or you know nquick asset ratio considering the nature of the business and the volatility the nsecond but the quick asset ratio or the asset test ratio is significant for the ncompany to remain liquid or what we call as solvent. So analysts and the business nmanagers. They maintain monitor the ratio. So that they can meet the company s nobligation and provide their to turn to the shareholders investor.
So that s it nfor this particular topic. So that s it for this particular topic. If you have nlearned and enjoyed watching this video. Please like and comment on this video nand subscribe to our channel for the ” .
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