Chapter 17, Problem 6QP

Calculating Net Float. Each business day, on average, a company writes checks totaling $23,400 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $38,100. The cash from the payments is available to the firm after two days.

a.    Calculate the company’s disbursement float, collection float, and net float.

b.    How would your answer to part (a) change if the collected funds were available in one day instead of two?

Summary Introduction

To determine: The disbursement, collection, and net floats of the firm.

Introduction:

Float is the difference between the bank cash and the book cash, denoting the net effects of checks during the clearing process.

Disbursement float is a condition where the company’s book balance is lower than the available cash balance.

Collection float is a condition where the company’s book balance is higher than the available cash balance.

Answer to Problem 6QP

The disbursement float is $93,600.

The collection float is −$76,200.

The net float is $17,400.

Explanation of Solution

Given information:

A firm writes a total check of $23,400 for the supplier’s payment. The clearing time for the check is 4 days. The payments obtained every day from the customer, by the company (through checks), is $38,100. However, the payment of cash to the company is available after two days.

The formula to calculate the disbursement float:

$\text{Disbursement float}=\left(\begin{array}{l}\text{Average number of days for the checks to clear}\\ \times \text{ Average monthly checks written}\end{array}\right)$

The formula to calculate the collection float:

$\text{Collection float}=\left(\begin{array}{l}\text{Average number of days for the check to clear}\\ \times \text{Average monthly checks received}\end{array}\right)$

The formula to calculate the net float:

$\text{Net float}=\text{Disbursement float}+\text{Collection float}$

Compute the disbursement float:

$\begin{array}{c}\text{Disbursement float}=\left(\begin{array}{l}\text{Average number of days for the checks to clear}\\ \times \text{ Average monthly checks written}\end{array}\right)\\ =4\times \$23,400\\ =\$93,600\end{array}$

Hence, the disbursement float is $93,600.

Compute the collection float:

$\begin{array}{c}\text{Collection float}=\left(\begin{array}{l}\text{Average number of days for the check to clear}\\ \times \text{ Average monthly checks received}\end{array}\right)\\ =2\times -\$38,100\\ =-\$76,200\end{array}$

Hence, the collection float is −$76,200.

Calculate the net float:

$\begin{array}{c}\text{Net float}=\text{Disbursement float}+\text{Collection float}\\ =\$93,600+\left(-\$76,200\right)\\ =\$93,600-\$76,200\\ =\$17,400\end{array}$

Hence, the net float is $17,400.

Summary Introduction

To determine: The disbursement, collection, and net floats of the firm if the collected funds were available in one day.

Answer to Problem 6QP

The disbursement is $93,600.

The collection float is −$38,100.

The net float of the firm if the collected funds were available in one day is $55,500.

Explanation of Solution

Given information:

A firm writes a total check of $23,400 for the supplier’s payment. The clearing time for the check is 4 days. The payments obtained every day from the customer, by the company (through checks), is $38,100. However, the payment of cash to the company is available after one day.

The formula to calculate the disbursement float:

$\text{Disbursement float}=\left(\begin{array}{l}\text{Average number of days for the checks to clear}\\ \times \text{ Average monthly checks written}\end{array}\right)$

The formula to calculate the collection float:

$\text{Collection float}=\left(\begin{array}{l}\text{Average number of days for the check to clear}\\ \times \text{Average monthly checks received}\end{array}\right)$

The formula to calculate the net float:

$\text{Net float}=\text{Disbursement float}+\text{Collection float}$

Compute the disbursement float:

$\begin{array}{c}\text{Disbursement float}=\left(\begin{array}{l}\text{Average number of days for the checks to clear}\\ \times \text{ Average monthly checks written}\end{array}\right)\\ =4\times \$23,400\\ =\$93,600\end{array}$

Hence, the disbursement float is $93,600.

Compute the collection float:

$\begin{array}{c}\text{Collection float}=\left(\begin{array}{l}\text{Average number of days for the check to clear}\\ \times \text{ Average monthly checks received}\end{array}\right)\\ =1\times -\$38,100\\ =-\$38,100\end{array}$

Hence, the collection float is −$38,100.

Calculate the net float:

$\begin{array}{c}\text{Net float}=\text{Disbursement float}+\text{Collection float}\\ =\$93,600+\left(-\$38,100\right)\\ =\$93,600-\$38,100\\ =\$55,500\end{array}$

Hence, the net float is $55,500.