Duplessis.SG.Chapter 25.doc

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Department
Management and Organizational Studies
Course
Management and Organizational Studies 2275A/B
Professor
Henry Meredith
Semester
Winter

Description
CHAPT25:BUSINESS AND BANKING C HAPTER 25 B USINESS AND B ANKING Objectives After studying this chapter, you should have an understanding of: • the relationship between a business and its bank • the legal framework of negotiable instruments • the rights and obligations of those connected with negotiable instruments • the legal challenges involved in electronic banking and payment options Learning Outcomes • Understand the regulation of banks (page 640) • Understand the duties of the bank to the customer (page 641) • Understand the duties of the customer to the bank (page 642) • Understand the bank-customer relationship (page 642) • Understand the risk of the person writing a cheque (page 646) • Understand the risk of the person accepting a cheque (page 647) • Understand the role of the bank in cashing cheques (page 648) • Recognize the risks associated with electronic banking (page 650) • Compare the risks of each method of accepting payment (page 654) Chapter Summary Customers should be wary of their relationship with their banks, not because bank’s attempt to take advantage of them, but because the relationship is a contractual one. The rights and obligations are found in the contract, and because the bank’s write the contracts, the language tends to favour the bank’s interests more than those of their customers. The chief effect of a banking contract is to transfer risk from the bank to the customeIf the customer appreciates this reality, her level of disappointment, frustration, and financial loss is likely to be less than if her expectations of the bank are unrealistic. The established system for negotiable instruments focuses on the commercial convenience of instruments circulating freely, with little need for the various holders to be concerned about their validity as long as the requirements for negotiability are met. It is a paper-based system that places prime importance on the piece of paper and the secure status of those in possession of it. The primary right is the ability of a holder in due course to collect from the creator of the instrument – the person whose promise to pay originated the transactionThe main obligation is that of the creator or drawer of the instrument to pay, regardless of events that preceded or followed the creation of the instrument. The instantaneous nature of electronic transactions greatly improves efficiency, but it also makes the transfers irrevocable. The absence of paper and the inapplicability of the rules that govern paper transactions create major challenges for security and liability. 149 PART 8: FINANCING THE BUSINESS Copyright © 2011 by Nelson Education Ltd. CHAPTE25:BUSINESS AND BANKING Study Outline Use this outline to prepare a complete set of notes for this chapter. The Banking Relationship – page 640 _______________________________________________________________________ _______________________________________________________________________ Regulation of banks_______________________________________________________ _______________________________________________________________________ The bank-customer agreement_______________________________________________ _______________________________________________________________________ Duties of the bank and the customer__________________________________________ _______________________________________________________________________ The bank-customer relationship______________________________________________ _______________________________________________________________________ Negotiable Instruments – page 643 _______________________________________________________________________ _______________________________________________________________________ Cheques_____________________________________________________________ Promissory notes_________________________________________________________ Bill of exchange__________________________________________________________ Negotiable instruments____________________________________________________ Steps in the cheque circulation process________________________________________ _______________________________________________________________________ Implications of creating a cheque____________________________________________ _______________________________________________________________________ Comparison of payment and collection arrangements_____________________________ _______________________________________________________________________ Implications of accepting a cheque___________________________________________ _______________________________________________________________________ Certification__________________________________________________________ Stop payment_________________________________________________________ Endorsements_________________________________________________________ _______________________________________________________________________ Electronic Banking – page 650 _______________________________________________________________________ _______________________________________________________________________ 151 PART8FINANCING THE BUSINESS Methods of Payment – page 654 _______________________________________________________________________ _______________________________________________________________________ Comparative Risks of methods of accepting payment_____________________________ Cash ___________________________________________________________ Cheque ___________________________________________________________ Credit card___________________________________________________________ Debit card ___________________________________________________________ Credit ___________________________________________________________ SELF-ASSESSMENT Key Terms Briefly define each term in the space provided. Banking agreement – page 641 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Money laundering – page 642 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Cheque – page 643 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Promissory note – page 643 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Bill of exchange – page 644 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Negotiable instrument – page 644 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Copyright © 2011 by Nelson Education Ltd. CHAPTE25:BUSINESS AND BANKING Holder – page 646 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Holder in due course – page 646 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Consumer note – page 646 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Negotiation – page 647 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Endorsement – page 647 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Certification – page 647 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Stop payment – page 648 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Endorsement in blank – page 648 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Restrictive endorsement – page 648 _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Special endorsement – page 649 _______________________________________________________________________ _______________________________________________________________________ 153 PAR8:FINANCING THE BUSINESS _______________________________________________________________________ Electronic banking – page 650 _______________________________________________________________________ _______________________________________________________________________ Matching Match the correct letter of the most appropriate term in the space provided before each sentence. Please note that you will use only 10 of the terms so you must choose the best term available to match with its description. A Banking agreement B Bill of exchange C Certification D Cheque E Consumer note F Credit card G Debit card H Electronic banking I Endorsement J Endorsement in blank K Holder L Laundered money M Negotiable instrument N Negotiation O Promissory note P Restrictive endorsement Q Special endorsement R Stop payment 1. ____ Income from criminal activity that is reported as income from a legitimate business. 2. ____ A bill of exchange that is payable on demand. 3. ____ A document that creates liability for payment that is independent of the original debtor-creditor relationship. 4. ____ A process whereby the bank guarantees payment of a cheque. 5. ____ Signing a cheque on the back, allowing the holder to cash it. 6. ____ Paperless banking. 7. ____ A method of payment where there is a guarantee of payment in return for a portion of the proceeds of a sale. 8. ____ A method of payment where there is an immediate transfer of funds. 9. ____ An order to a person to pay an amount to another person. 10. ____ A written promise to pay an amount. Copyright © 2011 by Nelson Education Ltd. CHAPTER25BUSINESS AND BANKING Questions Write a short, point-form answer for each question in the space provided. To assist you in understanding the chapter, it is recommended that you also use additional paper to write a full and complete essay answer for each question. 1. What is the simplest form of a banking relationship? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 2. What impact did regulatory changes have on the banking relationship? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 3. Who has jurisdiction over banks? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 4. What are the main purposes of the Bank Act? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 5. What regulates the relationship between banks and individual customers? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 6. How is international banking governed? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 155 PART8:FINANCING THE BUSINESS _______________________________________________________________________ 7. How can a certified cheque protect the holder against the risk of nonpayment? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 8. What are the general purposes of the operation of account agreement? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 9. What are the duties of the bank? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 10. What are the bank’s obligations with respect to suspected money laundering? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 11. What are the duties of the customer? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 12. Who do standard banking documents typically protect? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 13. What additional obligations might the bank incur if it provides financial advice? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Copyright © 2011 by Nelson Education Ltd. CHAPTE25:BUSINESS AND BANKING _______________________________________________________________________ _______________________________________________________________________ 14. A cheque is an I.O.U. What are the implications of this concept? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 15. What are the technical requirements for an instrument to be negotiable without for validity checks? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 16. How is a cheque different situation from an ordinary assignment of contractual rights? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 17. In a commercial context, what problems arose with respect to nature of cheques? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 18. What role do commercial notes play in the business environment? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 19. How can a certified cheque protect the holder against the risk of nonpayment? _______________________________________________________________________ _____________________________________________________
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