Question

7. Check clearing and the use of float

Float is defined as the difference between the balance shown on the books and the balance in the bank account. A lag often occurs between the time receipts and disbursements are recorded on the company’s books and when the transactions clear the bank.

Consider the following scenario:

Destin Industries received a $20,000 check from one of its customers, deposited it into its bank account, and recorded it in its bank register. The funds were reflected in Destin’s bank account two days later.

What type of float does this scenario describe?

Disbursement float

Net float

Collection float

Next, consider the case of Washburn Flooring Company:

The management at Washburn Flooring has determined that it takes an average of six days for checks the company writes to clear its bank account. Cash receipts from customers are reflected in Washburn’s bank account an average of two days after the checks are received. On an average day, Washburn writes checks that total $40,000, and it receives checks from customers that total $50,000.

Compute the collection float, the disbursement float, and the net float in dollars in the following table. (Note: By definition, collection float is always considered negative, and disbursement float is always positive. Both should be shown as positive numbers here. The net float, however, should be shown as positive if it is favorable and as negative if it is unfavorable.)

	Washburn Flooring Company
	Float Calculations
Collection float
Disbursement float
Net float

Given this information, you can deduce that on an average day, Washburn Flooring’s bank balance is   its book balance.

Answer 1

A Collection Float is when a check is received but it has not reflected in the bank statement.

A Disbursement Float is when a check is written but it has not reflected in the bank statement.

1) According to the above, this is a Collection Float as it is related to deposits/receipts.

2)

Collection Float = Check received from customer = $50,000 x 2 = $100,000

Disbursement Float = Check written to customer = $40,000 x 6 = $240,000

Net Float = Check written to the customer - Check received from the customer = $240,000 - $100,000

= $140,000 (Favorable)

3. Since it is a positive Net Float, the Bank Balance on an average day is greater than its Book Balance.