PROC 200 Lecture 20: PROC-200-001 - Notes for November 30-December 2

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21 Feb 2018

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Review class wednesday, nov 30 - friday, december 2, 2016 are excluding) Should also mention group of contracts doctrine (see notes) Look to whether there is or no a contract and then look at the consequences. Then you see that there is a 3rd party with no contract. Is there any accessory rights here no (but you should say it (you need to show what you. 1440 general rule of privity, does not look like a stipulation of another. 1458 if there is a contractual liability we cannot invoke xk claim but does not apply. 1444 stipulation for antoehr (gives the third person) Bank of montreal v bail ltee (1992) case use this as the template. Yes there would be xk claim (1457 see notes: 1444. A person may, in a contract, stipulate for the benefit of a third person: the stipulation gives the third person beneficiary the right to exact performance of the.

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You are doing a walk-through of the credit and collections function to get an idea of what internal controls exist and where there might be weaknesses. Then, after you finish, you or another member of the audit team will be testing the system to determine whether the internal controls actually exist and actually work as you have been told. In the meantime, keep your eyes, ears, and mind open for any weaknesses in internal control.

The department head of the credit and collections department is telling you how things work in the department. "Jenny, here, receives the mail and distributes it to the various collectors. They each open their own mail. There is a lot of correspondence going back and forth to and from customers, so it is easier if each collector just handles her own mail." It is easy for Jenny to distribute the mail because most of the letters are addressed to a specific individual.

You watch as one of the individuals opens the mail and handles the items inside. Many of the items are disputes-the customer says the items billed were not ordered, or, if ordered, were not received. Every such letter results in the disputed bill being written off. As the department head explains, the vice president of sales told him, a few years ago, that too many customers were complaining that the credit department was too tough on them, so he had decided that rather than have any more complaints, every such bill would be written off. The procedure is that the collector initiates a form, called a write-off form, to write off a particular amount from a customer's balance. In the explanation block, the collector simply writes "customer dispute." This form is signed by the collector, sent to accounting, and accounting processes the forms each Wednesday. There are so many letters with so many disputes that the department has a monthly competition for the most unusual letters, which are tacked up on a bulletin board. All the rest of the dispute letters are thrown away as soon as the collector has filled out the write-off form.

Collectors also receive checks in the mail. These are payments from customers whose accounts are wholly or partly overdue. As one of the collectors explains, they each receive a print-out once a month, so if the customer sends in a payment, there is no way for the collector to find out about it before the next month's print-out arrives unless the collector receives the payment. Most of the collectors process dozens of payments each month. They make whatever notations they need on the monthly print-out, prepare a deposit ticket, send the department's runner to the bank each Friday (collections are accumulated until Friday, with the customers' payments being held in an otherwise empty desk drawer until then), and send the receipted deposit ticket on to the department which records collections of cash. The credit and collections department also sends a listing of which customers to credit for having paid all or part of their balances.

Near the end of each fiscal quarter, the corporate controller gets a preliminary set of financial statements, and then he tells the department head by telephone how much the department is allowed to write off in bad debts. Thus, the company writes off bad debts only in the third month of each fiscal quarter. "Why does he tell you by telephone?" you ask of the credit and collections manager. "He doesn't want any written record of it," is the reply.

You are interested in how the department decides which customer balances to write off as uncollectible and which to leave on the books. "We write off the oldest ones, up to the amount of what we have been told we can write off," says the credit and collections manager. "That way, our percentage of bad debts always comes out pretty much in line with what we have done before, and the auditors have always been satisfied with it. They had read some academic articles from some people who recommended using time-series analysis to see if the numbers were correct, so they test the accounts receivable account and satisfy themselves that the sales and receivables are real, but they always test the write-offs and bad debts expense simply by using the time-series analysis recommended by the accountants with those fancy doctorates. Go ask the guy who ran the audit last year."

You inspect the process by which customer payments are received the regular way, which is done in a different department. The company has a special Post Office box set up. Twice a day, some one person from maintenance goes to the Post Office to pick up the mail, including the customer payments received at this special Post Office box. It is not always the same person from maintenance who goes to the Post Office; whoever is available when the department head looks around is typically the one who is sent.

When the person returns from the Post Office, he brings a bunch of mail to the cash receipts department, where the mail is opened and customers' checks are paperclipped to the envelopes they came in. One of the goals of the cash receipts department is to get the customer payments deposited promptly, so after all the checks are paper-clipped, someone from the department goes to the bank, fills out a whole bunch of deposit slips, deposits those checks, and comes back to the department with those receipted deposit slips. Then the department members try to figure out which customer paid which amounts. They are helped by the routing number on the checks, but those routing numbers represent banks, not customers, and multiple customers use the same banks. Consequently, they refer to a listing of routing numbers to identify the banks, then to a listing of banks to see which customers use those banks, and then to another copy of the same monthly print-out used in credit and collections to figure out which of the customers who use that bank must have paid that particular amount. If they cannot make a good guess, they call some of the customers to ask if they are the ones who paid the amount. Once they think they know who paid the amount, they generate a journal entry to debit cash and credit the customer's account; the credit to the customer's account is automatically also a credit to accounts receivable. Since they have a copy of the monthly printout of accounts receivable, when a customer's payment is not for the full amount of an invoice, they just go ahead and adjust that customer's account so the full amount of the invoice is taken off the customer's account. They say they are creating a lot of goodwill with customers that way.

a. What internal control weaknesses do you see in this system?

b. What are the potential effects of these weaknesses?

c. What do you recommend instead (that is, if you have such a recommendation)?

skycricket458

Argue either in favor or against the estate tax. Then, respond to at least two other students' posts in the following manner:

Support one studentâs argument with additional information or examples.

Counter one studentâs argument with information and/or examples.

Student 1 answer : Samantha

Samantha Caterina 5 posts

Re:Module 7 DQ 2

The estate tax is very tricky, it can be argued both ways, for and against. For arguments sake I would be in favor of the estate tax. Currently for 2017 the federal estate tax threshold is 5.49 million. This is only targeting the wealthiest of people. The estate tax will tax any amount of an estate above this. It makes up for a small portion of the total tax collected by the federal government but it is still a substantial amount. The estate tax can be different in each state therefore being taxed more if the threshold is smaller. It is argued that the successful decedent should not be penalized for being successful I would not agree this is true. They are no longer the owner of the estate and the money would just be passed to a beneficiary. The beneficiary then has the rights to do what they please with the money. This can cause the beneficiaries to become non-productive members of society. If the estate tax was taken out tax would have to be made up somewhere, therefore cause middle class taxpayers to pay more taxes. The estate tax does not target the average person only the wealthiest are affected by it. I do not think the estate tax needs to be taken out of order.

https://www.forbes.com/sites/kellyphillipserb/2014/10/06/guest-post-pros-and-cons-of-the-federal-estate-tax/#6e3c8eb975a6

Student answer Andrea:

Andrea Robinson-Parker 4 posts

Re:Module 7 DQ 2

The estate tax was once known as the death tax, there is a pun in there somewhere. Firstly, it is associated with the inheritance of a dead relative and secondly, it can be the death of small family businesses. I believe that this tax is essential for our country to survive. Bob Rywick, in his article, Pros and Cons of the Federal Estate Tax argues both sides of the coin. I agree with his pro stance and here is why:

Revenue from the estate tax will create around $200 billion revenue in the next several years. There has been a great increase in wealth in the recent past and this number may climb.

The estate tax will help to dilute the concentration of wealth. This concentration can be damaging to our free democratic society.

Many wealthy people donate large sums to charities each year to lower their tax bracket. If there was no estate tax, these donations would most likely drop off significantly.

Small business, (making less than $5,000,000) will not be affected. There are also rules set in place to protect farms regarding the valuation of farm land.

Less than 2/10 of 1% of the descendants dying each year will be affected by this tax, based on the current exemption amount.

Lastly, I personally believe that estate planning can alleviate some of these taxes. Estate taxes should not be confused with gift taxes. This is an option that can protect inheritances.

Student Answer

Lakisha Minniefield 3 posts

Re:Module 7 DQ 2

I am against âestate taxâ and feel that when the property value goes up, it will increase my mortgage payment each year. I agree with Justin Haskins article regarding scrapping property taxes because as a property owner, charging fees for a specific service should be allowable. Also, property owners should be able to choose where the property taxes should be allocated especially when it comes down to our public education. I have two children who are autistic and in the past it was very difficult to find a school who had the staff to supply all of their educational special needs. Even though we live in the best neighbors that were very costly, the schools zone in the area had 2 out of 10 rating so I would have to transfer my children our of the district in order to get better services. Currently, my husband is getting ready for retirement out of the military and we have looked at all 50 states within the United States to see which state would give us the most exemptions when purchasing a home. The state we chose to move back to is Texas because of the no state property taxes. Property tax for the state of Texas brings in the most money of all taxes available to local government to pay for schools, roads, police and firemen, emergency response services, libraries, parks and other services provided by local government. The state also has a variety of partial or total (absolute) exemptions from appraised property values used to determine local property taxes. A partial exemption removes a percentage or a fixed dollar amount of a property's value from taxation. A total (absolute) exemption excludes the entire property from taxation. Since we will be on a fixed income, Texas property tax exemptions for disabled veterans was the best out of all 50 states. However, we will still have to look for a county with low property tax rate. Since I am already a disabled veteran, Texas has a property tax exempt chart for qualifying disabled veterans.

The exemption amount that a qualified disabled veteran receives depends on the veteran's disability rating from the branch of the armed service.

Disability Exemption
Disability Rating	Exemption Amount Up To
10% to 29%	$5,000 from the property's value
30% to 49%	$7,500 from the property's value
50% to 69%	$10,000 from the property's value
70% to 100%	$12,000 from the property's value

*The Texas Comptroller website lists all of the benefits for disabled veterans regarding property tax exemptions.

Even as a disabled veteran, I would still have to pay property tax but the exemption will only exempt the amount of the disability rating off the value of property. Disabled veterans who are 100% total and permanently disable will be exempt from paying all property taxes. Financially, my family will still have to find a home affordable in a safe neighborhood, public education is rated above 7 out of 10 and choose a county that property taxes are low.

Reference:

https://www.comptroller.texas.gov/taxes

Short Story
âThe Betâ (or how your money finds its way to Wall Street)

Long Bets was seeded by Amazonâs Jeff Bezos and operates as a non-profit organization that administers just what youâd guess: long-term bets. To participate, âproposersâ post a proposition at Longbets.org that will be proved right or wrong at a distant date. They then wait for a contrary-minded party to take the other side of the bet. When a âdoubterâ steps forward, each side names a charity that will be the beneficiary if its side wins; parks its wager with Long Bets; and posts a short essay defending its position on the Long Bets website. When the bet is concluded, Long Bets pays off the winning charity.

Here are examples of what you will find on Long Betsâ very interesting site:

In 2002, entrepreneur Mitch Kapor asserted that âBy 2029 no computer â or âmachine intelligenceâ â will have passed the Turing Test,â which deals with whether a computer can successfully impersonate a human being. Inventor Ray Kurzweil took the opposing view. Each backed up his opinion with $10,000. I donât know who will win this bet, but I will confidently wager that no computer will ever replicate Charlie.

That same year, Craig Mundie of Microsoft asserted that pilotless planes would routinely fly passengers by 2030, while Eric Schmidt of Google argued otherwise. The stakes were $1,000 each. To ease any heartburn Eric might be experiencing from his outsized exposure, I recently offered to take a piece of his action. He promptly laid off $500 with me. (I like his assumption that Iâll be around in 2030 to contribute my payment, should we lose.)

Now, to my bet and its history. In Berkshireâs 2005 annual report, I argued that active investment management by professionals â in aggregate â would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of âhelpersâ would leave their clients â again in aggregate â worse off than if the amateurs simply invested in an unmanaged low-cost index fund.

Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds â wildly-popular and high-fee investing vehicles â that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers â who could include their own fund as one of the five â to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?

If Group A (active investors) and Group B (do-nothing investors) comprise the total investing universe, and B is destined to achieve average results before costs, so, too, must A. Whichever group has the lower costs will win. (The academic in me requires me to mention that there is a very minor point â not worth detailing â that slightly modifies this formulation.) And if Group A has exorbitant costs, its shortfall will be substantial. There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches.

In my lifetime, though, Iâve identified â early on â only ten or so professionals that I expected would accomplish this feat. There are no doubt many hundreds of people â perhaps thousands â whom I have never met and whose abilities would equal those of the people Iâve identified. The job, after all, is not impossible. The problem simply is that the great majority of managers who attempt to over-perform will fail. The probability is also very high that the person soliciting your funds will not be the exception who does well. Bill Ruane â a truly wonderful human being and a man whom I identified 60 years ago as almost certain to deliver superior investment returns over the long haul â said it well: âIn investment management, the progression is from the innovators to the imitators to the swarming incompetents.â

Further complicating the search for the rare high-fee manager who is worth his or her pay is the fact that some investment professionals, just as some amateurs, will be lucky over short periods. If 1,000 managers make a market prediction at the beginning of a year, itâs very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet.

But there would remain a difference: The lucky monkey would not find people standing in line to invest with him. Finally, there are three connected realities that cause investing success to breed failure. First, a good record quickly attracts a torrent of money. Second, huge sums invariably act as an anchor on investment performance: What is easy with millions, struggles with billions (sob!). Third, most managers will nevertheless seek new money because of their personal equation â namely, the more funds they have under management, the more their fees. These three points are hardly new ground for me: In January 1966, when I was managing $44 million, I wrote my limited partners: âI feel substantially greater size is more likely to harm future results than to help them. This might not be true for my own personal results, but it is likely to be true for your results. Therefore, I intend to admit no additional partners to BPL. I have notified Susie that if we have any more children, it is up to her to find some other partnership for them.â

The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.

In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial âelitesâ â wealthy individuals, pension funds, college endowments and the like â have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is âon an expectancy basis â clearly the best choice. My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade. Figure it out: Even a 1% fee on a few trillion dollars adds up. Of course, not every investor who put money in hedge funds ten years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is conservative.

Much of the financial damage befell pension funds for public employees. Many of these funds are woefully underfunded, in part because they have suffered a double whammy: poor investment performance accompanied by huge fees. The resulting shortfalls in their assets will for decades have to be made up by local taxpayers.

Human behavior wonât change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something âextraâ in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: âWhen a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.â

Question:
Summarize Buffettâs views on âThe Betâ and passive investment management

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PROC 200 Lecture 20: PROC-200-001 - Notes for November 30-December 2

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