The Importance of managing cash in hand Cash is considered an idle asset because it does not earn interest. Good financial management requires a firm to hold a limited amount of cash, but it is important for the firm to hold sulficient cash so that it can pay its current obligations, maintain its credit rating, and meet its unexpected cath needs. The following statement refers to a type of cash belance. Select the best type of cash balance to complete the sentence cash balance is held to allow firms to take advantage of any bargain purchases that might arist, Consider the following case of Portland Fabricators Inc.: Imagine that Portland Fabricators Inc. is a manufacturing company, Portland's chief financial officer is concerned about the risk of fluctuations in the latest cash forecast that was prepared for Portland. To mitigate the risk, the CFO has increased the cash balance on hand as a type of safety net ir the forecast is not met. What type of cash balance is this? Compensating O Speculative Precautionary Transactions 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 log 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 sent a $100,000 check to one of its suppliers and recorded it on its books. Thut funds were evallable in Destin's account until the payment cleared five days later, What type of float does this scenario describe? Net float Collection float O Disbursement 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 four 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. cament float, and the net float in dollars in the following table. (Note: By definition, collection float is always That however should be 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 Washburr's bank account an average of four 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 noat 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 rost, 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 its book balance Given this information, you can deduce that on an average day, Washburn Flooring's bank balance is Save & Continue