Question

Which of the following statements regarding float is MOST true?

A. A net disbursement float is generally preferred over a net collection float.

B. To maximize the potential benefits of net float, firms should pay bills electronically, but request that customers pay by cheque.

C. A disadvantage of a disbursement float is that less bank funds are available to earn interest.

D. If Company A writes cheques to Company B, with an average processing delay of 10 days, this transaction would increase Company B's disbursement float, but decrease company A's collection float.

Answer 1

The most correct or true statement among the four statements is option a.

A company prefers net disbursement float over a net collection float. The term float refers to the time gap that exists in the processing of the financial transaction. If there is a net disbursement float then it means that the company will get time for the money to actually move from their account to thw other party's account. But net collection float means that the company will face a delay in receiving the payment. This is not desirable for the company.

Option B is incorrect. To maximize the potential benefits of net float the company should pay bills through cheque so that it takes time to process and the debiting of the amount can be delayed. On the other hand if the payemnt is received through cheque then it will be received late. Instead, electronic payment should be preferred.

Option C is also incorrect as the bank pays interest on the money that the company has already spent. So disbursement float is not a disadvantage, in fact it is an advantage.

OptionD is also incorrect as the CompanyA's disbursement float and Company B's collection float will be increased.