Lecture 43 - Business Finance (ACC501) Lesson 43 Review of...

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225 Business Finance (ACC501) Lesson 43 Review of the Previous Lecture Short-Term Borrowing Cash Management Reasons of Holding Cash Topics under Discussion Float and Cash Management Cash Collection Cash Disbursement Investing Idle Cash Credits and Receivables Terms of Sale Credit Period Discount Instruments Float and Cash Management The difference between bank cash and book cash, representing the net effect of cheques in the process of clearing is called float . Cheques written by a firm generate disbursement float , causing a decrease in the firm’s book balance but no change in its available balance. Gm Inc. has $100,000 on deposit with its bank. On June 8, it buys some raw material and pays with a cheque for $100,000. reducing the book balance by $100,000 immediately. GM’s bank is unaware of this activity until the cheque is presented, say June 14 and the firm’s available balance is greater than it’s book balance by $100,000. Before June 8, the GM’s float is zero: Float = Firm’s available balance – Firm’s book balance = $100,000 – 100,000 = 0 Form June 8 to June 14, the position is: Disbursement Float = Firm’s available balance – Firm’s book balance = $100,000 – 0 = 100,000 Cheques collected by the firm create collection float, which increases book balances but does not immediately change available balance.
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226 In general, the firm’s payment activities generate disbursement float and its collection activities generate collection float. The net effect, the sum of both floats is the net float, equal to the overall difference between the firm’s available balance and its book balance. If net float is positive, then the firm’s disbursement float exceeds its collection float and its available balance exceeds its book balance, and vice versa. Suppose you have $5,000 on deposit. One day, you write a cheque for $1,000 and deposit $2,000. What are your disbursement, collection and net floats? After writing the cheque, you show a balance of $4,000 on your books, but bank shows $5,000 while the cheque is clearing. So you have a disbursement float of $1,000 Depositing $2,000 increases the book balance to $6,000, but the available balance
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Lecture 43 - Business Finance (ACC501) Lesson 43 Review of...

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