afp_treasury4_session chp 9 and 10
TRANSCRIPT
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Working Capital Management
Session 5, Module Three:
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Chapter 9:
Working Capital Metrics Chapter 10:
Collections,Concentration
andDisbursements
Session 5, Module Three:Working Capital Management
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Overview - 2
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Outl ine:
Basic Financial Concepts
Working Capital Metrics Cash Conversion Cycle (CCC)
Cash Discount Calculations
A/R Monitoring and Control Collections and Concentration Calculations
Chapter 9: Working Capital Metrics
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 3
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Time Value of Money Dollar today worth
more than dollartomorrow
How much to cashsettle future debtnow?
Cash flow value: Amounts Interest rate When expected
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 4
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What is the future value of $100 invested for 2years, compounded annually, at 10%/year?
Future Value
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 5
n
2
Future Value = PV (1 + i)
= $100 (1 + .10)
= $100 (1.21) = $121Where:
FV = Future valuePV = Present valuei= Periodic interest raten = Number of periods
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What is the present value of $2,382 to bereceived after 3 years, discounted at 6.00%annually?
Present Value
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 6
Where:
FV = Future valuei = Periodic interest raten = Number of periods
n 3
$2,382FVPresent Value= =
1 + i 1 + 0.06
$2,382= = $2,000
1.191
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Degree current obligations covered by currentassets
Example: Per $1 of short-term liabilities, $2.35of cash and short-term assets expected tobecome cash in next year
Working Capital: Current Ratio
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 7
Total Current Assets $8,000Current Ratio = = = 2.35
Total Current Liabilities $3,400
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Degree companys current liabilities coveredby most liquid current assets
Example: $1.32 of very liquid assets for each$1 of short-term liabilities
Working Capital: Quick Ratio
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 8
(Cash) + (Short-Term Investments) + (Accounts Receivable)Quick Ratio =Total Current Liabilities
($1,500 + $1,300 + $1,700)= = 1.32
$3,400
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Ability to repay debt
Low ratio is weak ability to repay debt Reliable predictor of financial failure
High ratio implies more safety
Working Capital: Cash Flow to Total DebtRatio
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 9
Net Income + DepreciationCash Flow to Total Debt Ratio =
Short-Term Debt + Long-Term Debt
$850 + $200 $1,050= = = 0.184
$1,800 + $3,900 $5,700
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Amount current assets exceed currentliabilities (not a ratio)
Example: If all current assets convert to cash,would have $4,600 over what needed to pay offshort-term liabilities
Working Capital
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 10
Working Capital = Current Assets Current Liabilities
= $8,000 $3,400 = $4,600
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Elements in the CCC:Cash Conversion Cycle (CCC)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 11
Days inventory
Days receivables
Days payables
Inventory 365
Cost of Goods Sold
Accounts Receivable365
Revenues
Accounts Payable365
Cost of Goods Sold
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Time to convert
Cash outflow (payment to supplier)
into Cash inflow (customer collection)
Calculation of the CCC
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 12
Cash Conversion Cycle = Days' Inventory + Days' Receivables Days' Payables
= 103.15 Days + 41.37 Days 63.48 Days = 81.04 Days
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Discussion QuestionGiven a cash conversion cycle of 81.03 days,how many CCCs are there in a year (cashturnover ratio)?
Answer (p.3-86):
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 13
365 DaysCash Turnover =
Cash Conversion Cycle
365=
81.03
= 4.5 Times
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Company-to-company (days not $s)
Less frees up cash
Days of Working Capital (DWC)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 14
DWC = DSI + DSO - DP
= 103.15 + 82.74 - 63.48 Days
Where:
DSI = Days Sales in Inventory103.15 daysDSO = Days Sales Outstanding82.74 daysDP = Days payables63.48 days
Example:
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Should a discount be taken if the cost of short-term funds is 8%?
Cost for Buyer Not Taking Cash Discount
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 15
D 365Discount Cost = 100 D N T
2 365=
100 2 30 10
2 365= = 0.0204 18.25 =.3723 or 37.23%98 20Where:
D = Discount percentage2%N = Net period30 daysT = Discount period10 days
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Discussion QuestionWhich is a situation when a buyer should forgoan offered cash discount?
a) Firm invests in short-term funds that earn less thandiscount rate
b) Firm has insufficient cash to pay now but has short-term credit with lower interest rate than cost of nottaking discount
c) Firm has ability to change discount terms bystretching A/P terms
d) The discount should never be foregone
Answer: c (p.3-89)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 16
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Sellers induce early payment or offer competitivediscount.
Example of sellers NPV loss if discount taken: Credit
sale of $100, terms 2/10, net 30, 8% annual interest.
Impact to Seller of Offering Cash Discount
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 17
Receive on Day 10
Receive on Day 30
Credit Sale 1 D $100 1 .02PV = = =$97.78
Annual Interest .081 + T 1 + 10
365 365
Credit SalePV = Annual Interest
1 + N365
Day 10 Day 30
$100= =$99.34.08
1 + 30365
NPV = PV PV = $97.78 $99.34 = $1.56
Where:D = discount rate; T = days in discount period; N = days in net period
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Discussion QuestionWhat can a treasury professional discover bymonitoring individual accounts receivable?
a) Errors or delays in payments by credit card that areslowing collections
b) Customers who may delay payment intentionallyuntil follow-up is initiated
c) Change in financial condition that may result inslower payments and require extension oflonger credit terms
d) Increase in receivables that affectsliquidity
Answer: b (p.3-92)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 18
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Company has outstanding receivables of $285,000and credit sales of $310,000 at first quarter end.Using a 90-day averaging period, DSO is:
Days Sales Outstanding (DSO)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 19
$310,000Credit Sales in PeriodDaily Credit Sales = = = $3,444.44
Days in Period 90
$285,000.00Accounts ReceivableDSO = = = 82.74 Days
Daily Credit Sales for Period $3,444.44
Average Past Due = DSO Avg. Days of Credit Terms
= 82.74 Days 30 Days = 52.74 Days
Could be bad, e.g., if credit terms are net 30:
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A/R current and past-due
30-day increments
Customer or aggregate basis
Percent past due
Aging Schedule
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 20
Age of A/R Amount of A/R % of Total A/R
Current $1,750,000 70%
1-30 days past due 375,000 15%
31-60 days past due 250,000 10%
Over 60 days past due 125,000 5%
Total $2,500,000 100%
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Discussion QuestionInternal processing has $99k annual float, 9% opportunitycost and $3k in variable internal processing. A lockboxhas $24m dollar-days in 30 days, $10k in fixed costs and
$6k in variable costs. Method with net benefit?a) Internal processing: $14k
b) Internal processing: $685k
c) Lockbox: $14k
d) Lockbox: $685k
Answer: c. $24m/30 = $800k;$800k x 0.09 = $72k; $99k - $72k = $27k;$27k - $10k - 6k + $3k = $14k lockbox (p.3-98)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 22
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Total ACH costs = $1.00 Total wire transfer costs = $10.00 Opportunity cost of funds = 3.5%
Break-Even Wire Transfer Amount
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 23
Wire Cost ACH CostMinimum Transfer =
Opportunity CostDays Accelerated
365 Days
$10.00 $1.00=0.035
1 Day365 Days
= $93,858
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Outl ine:
Disbursements Collections
Concentration of Funds
Payments Fraud
Chapter 10: Collections, Concentration andDisbursements
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Disbursements
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Disbursement Products
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 26
ZBA
Multi-tiered
Deposit-only
Master account
Payment info
Positive pay
Reverse
Disbursement bank
Fraudu lent endo rsement
Controlleddisbursement
Clearingnotification e.g., ZBA
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Discussion QuestionWhich requires indemnity from the alternatebank for losses including fraud?
a) Debit filtersb) Default pay all or pay none
c) Multiple drawee checks
d) Imprest accounts
Answer: c (p.3-111)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 27
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DirectDeposit
(ACH)Payments
Global expansion (SEPA, cross-border ACH)
Payroll, reimbursement, interest,tax, dividend and B2B
TaxPayments
US EFTPS Sub-sovereign electronic payment
NACHA: ACH TXP
WireTransfers
Immediate and final Telephone and online initiation
Electronic Disbursement Products
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 28
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Repetitive
Semi-repetitive
Non-repetitive(free form)
Drawdown
Standing
Wire Transfer Usage Categories
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 29
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P-cards
T&E cards
Fleet cards
Combined cards
Payroll/stored value cards
EBT cards
Card Payments
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 30
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Freight payments Payroll services
Integrated or
comprehensiveA/P
Payment factories
Outsourced A/P Services
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Discussion QuestionWhich integrated or comprehensive A/P servicesends only limited information to the FSP andstaggers payments by transaction date?
a) Send data file with list of all warehoused payments to bemade
b) Send data file with list of all immediate payments to bemade
c) FSP maintains database of payees and warehouses
the itemsd) FSP maintains database of payees and issuespayments immediately
Answer: c (p.3-118)v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 32
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Discussion QuestionWhich provides same day or pr ior dayinformation to help with fraud control?
a) Balance reporting servicesb) Interface with A/P
c) Account reconciliation program
d) Imaging technology
Answer: a (p.3-119)
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Collect
Speed
SecurityRemittanceInformationAvailability
Cost
Collections
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 35
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Discussion QuestionA retailers over-the-counter/field depositsystem gets cash and checks from local banksat each POS. Which offers cash/coin pickup
and delivery and immediate provisional credit?
a) A depository institution near each field location
b) Virtual vault services
c) Remote deposit capture (RDC)d) Armored carriers
Answer: b (p.3-122)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 36
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ScanandImage Eliminates check
transit
Can incorporatevirtual vault
Faster, cheaper
De
pository
Bank Eliminates local
bankconsolidation
Service distantlocations
USD only
Remote Deposit Capture (RDC)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 37
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Merchant services
Check conversion
Mail payments
Lockbox Retail
Wholesale
Hybrid
Other Domestic Collection Products
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Reduced mail and processing float
Improved access to remittance information Reduced risk and improved security
Improved control and record keeping
Uninterrupted service Scalability
Proper segregation of duties
Lockbox Advantages vs. InternalProcessing
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 39
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Electronic bill/invoice presentment andpayment
Send billing data to customers E-mail link to companys billing portal
Customer triggers EFT debit
Control of remittance information
Less exception processing
EBPP and EIPP
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 40
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Discussion QuestionWhat is a successor to the electronic lockboxthat consolidates all remittances into acommon stream of data in a common format?
a) EFT with remittance information
b) EBPP and EIPP
c) Consolidated remittance processing(CRP)
d) Imaging technology
Answer: c (p.3-127)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 41
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Cross-Border Collections and Trade
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 42
Other methods: Bankers acceptance (BA)
Trade acceptance
Barter, countertrade, trading companies
SellerMost Protection
Least Protection
BuyerMost Protection
Least Protection
CASH IN ADVANCE
LETTER OF CREDIT
DOCUMENTARY COLLECTION
OPEN ACCOUNT
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Collect ion let ter
Name of seller (exporter)
Name and address of buyer (importer) Collecting bank information
Details of accompanying documentation
Date, tenor and value
Details of bank/other charges by party Recourse procedures
Nonstandard terms or conditions
Documentary Collection
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 43
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Discussion QuestionA _____ draft requires the ______ bank toreceive full and final payment before releasingdocuments.
a) sight; collecting
b) sight; remitting
c) time; collecting
d) time; remitting
Answer: d (Sight a.k.a. documents againstpayment; time a.k.a. documents againstacceptance.) (p.3-130)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 44
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Documentary Collection
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 45
1
4 DC
7Pays
Seller
Remitting Bank
2
DC
3
L/C
8
Pays
Buyer
Collecting Bank
5
DC
6
Docs
Debit
+
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Commercial L /C
To ship domestic orinternational goods
Bank roles Issuing Advising Confirming
Typically requires
Draft Commercial invoice Shipping documents
Standby L/C (Guaran tee)
Issued primarily bybanks
Ensure financialperformance of bankscustomer to a 3rd-party
Payable events
Typically requires
Sight draft Documentation
Letter of Credit (L/C)
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Letter of Credit (L/C)
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 47
Seller (Beneficiary)
Advising Bank
2
L/C
Buyer (Applicant)
Issuing Bank
Purchaseagreement
requiring L/C
1
Pleaseissue
3L/C
4
L/C
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Bankers Acceptance (BA) Unconditional written
order directing bank topay sum of money
On demand At a definite time
By accepting, bankagrees to pay facevalue if buyer fails to
pay Hold to maturity
Sell at discount
BA financing cost: Discount rate Commission
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 48
Accepted
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Major ob ject ives:
Efficiently move funds
from deposit banks toconcentration bank
Minimize excessbalances
Concentrat ion enables:
Excess- -Deficit cash Locations Entities Currencies
Invest more, interest income
Pay debt faster,
interest expense Use discount terms,
COGS or operatingexpenses
Cash Concentration System Objectives
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 49
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Cash Concentration System
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 50
Sources Intermediaries Transfer Uses
LoanRepayment
S/TInvestment
PayrollVendor
PaymentsDividends
Field/Branch
FieldBank
Lockbox/Electronic
S/TBorrowing
Maturing S/TInvestments
Cash, Check orCard
Check, Wire,ACH
SubsidiaryPayments
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Domestic Concentration of Funds Large retailers
transmit receiptsfrom POS to
headquarters Wires expedite funds
transfers over ACH Large amounts
Same-day value
Finality
Sweeping (sweepaccount differs)
Collect receipts Local offices Local branches
Retail stores
Was field banks, nowRDC and virtual vault
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Entities use distinct depositoryaccounts
Full end-of-day balance transferto master concentration account
ZBA
Multiple location deposits
credited to one account Location-specific deposit reports
via unique location identifiers
Depositreconciliation
Bank Services for Domestic Concentration
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 52
Both mus t
use
mult ip le
branches
of single
bank.
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Physical poo l ing
Automatic ZBA ofsubaccounts
Multiple legal entities,countries
Same currency
Intercompany loans at
arms length
Not ional poo l ing
Balancing entries onvirtual accounts
No physical moves Cross-guarantees
Disallowed in US,Germany, Mexico,
Japan and Brazil
Global Concentration of Funds
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 53
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Notional Pooling Physical Pooling
Interest earned/paid asbank interest.
COMPENSATION Must use arms length, trackloans and allocate interest.
Can provide tax efficiency. TAX Withholding taxes can applyto intercompany loans.
Is highly complex duebanks and jurisdictions.
COMPLEXITY Greater transparency lowersregulatory concern.
Can be used acrossmultiple currencies.
APPLICABILITY Must be done on acurrency-by-currency basis.
Is restricted in manycountries
AVAILABILITY Is widely available and mostcommon form of pooling.
Pooling Comparison
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Discussion QuestionWhich is true of a bank overlay structure?
a) It uses sweeping not pooling.
b) It is used when primary bank has branches inseveral countries but not full domestic banking.
c) It uses primary bank for domestic transactions andto sweep surplus funds to local banks.
d) Local bank notionally pools balances on
overlay accounts for a multi-countrysolution.
Answer: b (p.3-142)
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Bank Overlay Structure
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 56
Home CountryNotional Pooling and/orPhysical Funds Transfer
Primary OverlayAccount
Primary Bank Concentration Account
Primary OverlayAccount
Primary OverlayAccount
Local Account
Local Account
Local Account
Local Account
Local Account
Local Account
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Attempted fraud common, success less so
Controls Positive pay
ACH filters and blocks Daily reconciliations Security feature check stock Segregation of duties Dual EFT authentication No or few non-repetitive wires Separate deposit and disbursement accounts Dedicated EFT computer
Payments Fraud
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Discussion QuestionWhich is a good way to reduce credit cardidentity theft?
a) Use holder in due courseb) Use non-photo-reproducible features
c) Use address verification service
d) Use neural networks to eliminate card verificationvalues or codes
Answer: c (p.3-144)
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Assignment:
Complete the following tasksfor Module Three, Chapter 11:
Review the chapter. Complete the test-your-understanding questions at
the end of the chapter. Review the online flashcards. Complete the online calculations. Complete the online module-specific test. Complete the Exam Practice (Describe and
Differentiate) questions (located at the end of th emodule textboo k).
End of Session 5