Question

 

A) What is the float and how can a company use it for working capital? Provide an example that illustrates how it happens.

B) If the company records indicate the following:

Opening amount $10,000

Deposits 30,000

Cheques -22,000

Closing balance $18,000

 

The bank statement indicates that the opening amount is $10,000, the deposits are 22,000 and the cheques that have cleared are 2,000, what is the amount of the float?

Answer 1

Float = firm's available balance – firm's book balance

In financial terms, the float is money within the banking system that is briefly counted twice due to time gaps in registering a deposit or withdrawal. These time gaps are usually due to the delay in processing paper checks. A bank credits a customer’s account as soon as a check is deposited. However, it takes some time to receive a check from the payer’s bank and record it. Until the check clears the account it is drawn on, the amount it is written for "exists" in two different places, appearing in the accounts of both the recipient’s and payer’s banks.

 

Individuals often use float to their advantage. For example, Amanda has a credit card payment for $500 due April 1. On March 23, she writes and mails a check-in that amount, even though she doesn't have $500 in her bank account. However, she knows that her paycheck will be deposited in her checking account by March 25—and she counts on the fact that the credit card company probably won't receive and present her check for payment until April 1. She has $500 worth of float—the time between the writing of her check and the time her check clears—for those days.

 

If she were tech-savvy, she could essentially do the same thing by going online on March 23 and scheduling an electronic payment on the credit card company's website for April 1, again counting for her bank to have posted her paycheck by March 25.

a) Deposit as per Firms record = 30000

     Deposit as per Bank record = 22000

     Net Unfavourable Float      = 8000

 

b) Cheques cleared as per Firms record = 22000

     Cheques cleared as per Bank record = 2000

     Net  favourable Float                         = 20000

 

c) Net float = b-a

                   = 20000-8000

                   =12000