Q1BP_a City Farm Insurance has collecti... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 3: Q1BP_a (page 220)

City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers so the firm鈥檚 checks will take longer to clear the bank. Collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.
a. If City Farm has $5 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up?

Short Answer

Expert verified

The cash management has freed up $13,000,000.

Step by step solution

Meaning of cash management system

The cash management system is the management process that helps the organization in controlling its cash inflows and outflows. Cash management is important for maintaining the financial stability of the organization.

Money freed up by the cash management system.

The cash management system has freed up $13,000,000.

$\begin{array}{rcl} C h a n g e i n c o l l e c t i o n & = & P e r d a y c o l l e c t i o n 脳 R e d u c t i o n i n c o l l e c t i o n t i m e \\ = & $ 5, 000, 000 脳 2 d a y s \\ = & $ 10, 000, 000 \end{array}$

$\begin{array}{rcl} C h a n g e i n d i s b u r s e m e n t s & = & P e r d a y d i s b u r s e m e n t 脳 I n c r e a s e i n d i s b u r s e m e n t s \\ = & $ 3, 000, 000 脳 1 d a y s \\ = & $ 3, 000, 000 \end{array}$

$\begin{array}{rcl} F r e e d u p c a s h & = & I n c r e a s e i n c o l l e c t i o n + D e l a y e d i n d i s b u r s e m e n t \\ = & $ 10, 000, 000 + $ 3, 000, 000 \\ = & $ 13, 000, 000 \end{array}$

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Account	Receivable balance outstanding	Average age of account over the last year
A	\(60,800	22
B	\)168,000	43
C	\(78,300	19
D	\)24,300	55
E	\(58,900	42
F	\)238,000	39
G	\(30,400	16
H	\)374,000	72
I	\(41,400	32
J	\)96,500	58
K	\(292,000	17
L	\)67,700	37

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Short Answer

Step by step solution

Meaning of cash management system

Money freed up by the cash management system.

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