Question

In: Accounting

1) Mention at least 3 reasons why a company has cash balances. 2) Explain what and...

1) Mention at least 3 reasons why a company has cash balances.

2) Explain what and how the concepts of work:?

"Lockbox"?

"Float"?

Solutions

Expert Solution

Answer(1): Cash- It is called liquid cash or cash in hand. We all need some cash at any point of time so as the companies. These are the following reasons why companies need cash:

(1): To meet day to day expenses- There are many sundry expenses in the office that have to be paid in cash. Companies need cash balances for operating business and to meet daily expenditures.

Examples: Paying tea and snacks bills, electricity bills, wages to labor etc.

(2): For emergency and opportunities- Companies have to keep cash for emergency purpose, for example if there is banks strike and funds cannot be arranged soon then at that time, hard cash kept by companies, is used. Cash balance is also necessary to encash the opportunities.

(3): For good liquidity position- Companies need to have cash balances so that their financial statements can tell that companies have adequate cash and their liquidity position and quick ratio can increase.

Answer(2): Lockbox- It is the service, provided by banks to the companies for customers to facilitate the payment gateway. Banks provide a mail box/post office box, customers who pay the amount to companies, that amount does not directly receive by companies rather it goes to banks and then banks deposit the amount in companies' account. Lockbox works as mediator between banks and companies.


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