Chapter 17, Problem 17.1C

If a firm receives a check for $50,000, its collection float will change by what amount?

Summary Introduction

To discuss: The change in the amount of the collection float when a firm receives a check of $50,000.

Introduction:

Float refers to the difference between the cash value mentioned in the books and the cash value mentioned in the bank passbook.

Collection float is a condition where the company’s book balance is higher than the available cash balance.

Explanation of Solution

A firm has received a check of $50,000. At the time when a firm receives a check, it creates a collection float. This transaction can increase the book balance of the firm. However, this transaction cannot immediately change the available balance. Therefore, the amount of collection float will be increased by $50,000.

Conclusion

Collection float is a condition where the company’s book balance is higher than the available cash balance. If the company receives revenue through checks, it immediately increases the book balance. However, the available cash balance with the bank does not increase until the bank clears the check. This difference in the book balance and the available balance results in the collection float.