Finance Chapter on Float and Payables
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Questions and Answers

Which placement has no holding period and typically offers lower interest compared to others?

  • Savings or current accounts (correct)
  • Commercial Papers
  • Treasury Bills
  • Certificate of time deposits
  • What type of investment is considered high risk due to market fluctuations?

  • Bonds
  • Stocks (correct)
  • Treasury Bills
  • Savings accounts
  • Which financial instrument is a short-term obligation issued by the government?

  • Treasury Bills (correct)
  • Bonds
  • Mutual Funds
  • Unit Investment Fund (UITF)
  • What type of financial placement generally offers higher interest than savings accounts and has a defined maturity?

    <p>Certificate of time deposits</p> Signup and view all the answers

    Which investment option is characterized by pooling investors' funds to purchase financial instruments?

    <p>Mutual Funds</p> Signup and view all the answers

    What does Mail Float refer to?

    <p>The time between check issuance and deposit</p> Signup and view all the answers

    How many total days is the float for Summit Corporation?

    <p>10 days</p> Signup and view all the answers

    What is the primary purpose of stretching payables?

    <p>To slow down disbursements and retain cash longer</p> Signup and view all the answers

    Which of the following methods does NOT contribute to accelerating collections?

    <p>Delaying payment terms</p> Signup and view all the answers

    What is a lockbox system used for?

    <p>To facilitate quick and easy payment collections</p> Signup and view all the answers

    Which of the following accurately describes Processing Float?

    <p>Time between check receipt and deposit</p> Signup and view all the answers

    What does Concentration Banking involve?

    <p>Utilizing multiple accounts strategically for sales outlets</p> Signup and view all the answers

    What is the consequence of having a high Payable Turnover Ratio?

    <p>Faster payment to suppliers</p> Signup and view all the answers

    Study Notes

    Float

    • A float arises from the difference in timing between a company's record of payments and a bank's record of payments.
    • This difference is largely due to the time it takes for checks to be sent, processed, and cleared.
    • There are three categories of floats: mail float, processing float, and clearing float.

    Mail Float

    • The mail float is the time between when a check is issued and when it's received by the payee.

    Processing Float

    • The processing float is the time between when a payee receives a check and when they deposit it into their bank account.

    Clearing Float

    • The clearing float is the time between when a check is deposited and when it clears and becomes available for use.

    Stretching Payables

    • This is a process where a company delays making payments to suppliers.
    • The goal is to keep cash on hand longer, effectively earning interest on that money.

    Accelerating Collection of Receivables

    • This is when a company speeds up the process of collecting payments from customers.
    • This reduces the cash conversion cycle, which is the time it takes to convert raw materials into cash.
    • Some methods for accelerating collections can include:
      • Shortening credit terms to encourage faster payment.
      • Offering discounts to customers who pay early.
      • Implementing a lockbox system where a bank manages the payment process.
      • Using a direct send system where customers send payments directly to the company’s bank.
      • Utilizing concentration banking where a company maintains multiple bank accounts across its sales outlets.

    Excess Cash Placements

    • There are various options for managing excess cash available to companies:
      • Savings or current accounts: offer low interest rates but are liquid.
      • Certificates of time deposits: higher interest rates than savings accounts, but require a commitment period.
      • Treasury bills: a low-risk investment issued by governments, typically with short maturities.
      • Stocks: a higher risk investment, offering the potential for greater returns than bonds.
      • Bonds: debt securities issued by companies or governments to raise capital.
      • Unit Investment Fund (UITF): a pooled trust fund that invests in a variety of assets.
      • Mutual Funds: a diversified investment fund that allows investors to pool money together.
      • Commercial Papers: short-term debt issued by companies with high credit ratings, typically with a higher interest rate than savings accounts.

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    FLOATS - Finance Concepts PDF

    Description

    Explore the key concepts related to float, including mail float, processing float, and clearing float. This quiz also covers strategies for stretching payables and accelerating collections, crucial for effective cash flow management in businesses.

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