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Flashcards in negotiable instruments Deck (66):
1

draft and checks

three party instruments consisting of a drawer who orders a drawee to pay a payee

2

Promises to Pay

notes and CDs -- two party instruments consisting of a maker who promises to pay a payee

3

Draft-

Sight Draft- draft payable on demand immediatelyy upon issue by the drawer and sight to the drawee

Time Draft- a draft payable by the drawee at specific time

Trade Acceptance- draft drawn by a seller

4

Checks-

draft drawn on a bank payable on demand

5

Notes

Promissory Note- not payable on demand or within a definite time period to a specific payee or to the bearer

CDs- not made by a bank acknowledging that it has a deposit of funds payable to the holder.

Nonnegotiable instruments-
letter of credit
warehouse receipt
bills of lading
stocks and bonds
contracts

6

Negotiability

importance- special transferability ease and rights of HDCs are not available unless instrument is negotiable.
must be in writing
must be signed by the maker or drawer
unconditional promise to pay
Sum certain in money (fixed )
Payable on demand or at definite time
Words of negotiability- an instrument must be either payable to order or bearer.
--order instruments are payable to the order of: identified person, agent,

Bearer instruments are payable to bearer, identified person, cash or some non identified person

in writing
signed by maker or drawer
unconditioned promise
sum certain in money
payable on demand
words of negotiability

7

Factors not affecting negotiability

-contridictory terms- typewritten words previail over handwritten
- omission of date- unless necessary to determine a definite time for payment for a time instrument
-post dating or antedating
-collateral- additional promises to maintain or give addition or notation that collateral has been given as a security
--presence of guaranty-a guaranty of payment of an instrument does not affect NG

8

Negotiable instruments

Bearer Instruments- are negotiated by mere delivery to the holder
Order Instruments- negotiated only by a delivery plus an indorsement

9

Indorsements

four types:
Blank- convertsorder instrrument into bearer instrument. For transfer with consideration, all warranties are extended to subsequent holders. blank indorser has secondary liability to pay all subsequent holders.
Special
Qualified- usually uses the words "without recourse" or something similar. Disclaims contract signature liability and still extends transfer warranties to subsequent holders.
Restrictive (for deposit onlY)- does not prohibit further negotiation. except for conditional indorsement, liability to subsequent holders is limited to restriction being met.

10

Holder in Due Course

greater rights than an assignee in seeking payment. An HDC can take free from most defenses to contracts and be paid regardless of underlying contract disputes.

-must be holder
-must take instrument for value
-in good faith
-without notice that the instrument is overdue, been previously dishonored or any claim or defense.

11

Elements examined

Holder- someone in possession of an instrument that runs to them. if bearer paper, payable to their order, or instrument is indorsed to them.
Value- consideration

12

bearer instruments are negotiated by

delivery

13

Holder

party in possession of instrument. to be a holder of bearer paper requires delivery. to be holder of ORDER paper, requires delivery and proper indorsement.

14

Requirements to be HDC

1. must be holder
2. must take instrument for value
3. take in good faith
4. must take without notice of instrument being overdue or previously dishonored.

15

Demand instrument becomes overdue

unreasonable amount of time has lapsed or on the day after a demand payment is made.

16

HDC

holder who takes possession of a negotiable instrument for present vaule in good faith and without knowledge of any claims against instrument.

17

Checks become overdue

more than 90 days after their date

18

how do order instruments negotiated

by delivery plus indorsements

19

when does a time instrumentbecome overdue

if taken one minute after due date

20

blank indorsement

specifies no particular person to receive payment.

21

Restrictive indorsements

conditional
prohibitive
for deposit or collection only

22

Value

different from consideration

seller gives value if receives note from buyer who already owes money for goods delivered but has not paid FIFO concept for banks and giving value on deposited checks.

23

by delivery plus indorsement

order paper

24

by delivery

bearer paper.

25

Proper steps- sequence and requirements.

presentment- the holder presents instrument for payment from primary party.
(maker of CDs and noes and DRAWEES of drafts and checks

26

primary parties

Maker--- CDs and notes
Drawee- Drafts and checks

27

Who are the primary parties to negotiate

for notes-- payor/debtor
for CDs- bank that agreed to accept CD deposit
Checks- drawee bank where check is first presented.
Drafts-- drawee of the draft

28

Contingent fees can be charged only for

services rendered with an IRS examination or challenge to either the original or amended tax return or claim for refund where they were filed within 120 days for receiving a written notice of examination.
where a claim of refund is filed solely in connection with determination of statutory interest or penalties.
representing client in judicial procedings

29

Conflicts of interest

should not represent a client before the IRS if it would create a conflict of interest-1

30

must advise the client of any penalties

that are reasonably likely to apply with positions taken on tax returns.

31

100% penalty of gross income

for violating practice rules.

32

Stateboards

issue CPA licenses and take them away

33

AICPA

grants MEMBERSHIP and can punish members by suspensions.

34

You need a CPA license to do...

examinations, audits, reviews anything in accordance with PCAOB.

35

you do not need a CPA license to do the following

prep of Tax returns
management advisory services
preparing financial statements without issuing a report thereon

36

State boards

may revoke CPA licenses and impose other penalties for fraud in obtaining certificate, failure to comply with requirements for renewal, violation of professional standards, felony or any crime involving fraud

37

AICPA duties

investigates violations of AICPA code and sanctions minor cases, hears serious acses
automatic explusion for committig a felony, willfully failing to file tax return, filing a fraudulent tax return, aiding in preparing a fraudulent tax return,
revocation by a state board leads to automatic expulsion of AICPA

AICPA handels matters of national concern, involving more than one state and litigation
State boards handle more local level.

38

Tax return preparers are

PAID
PREPARE or retain employees to prepare
a substantial portion of any federal tax return or refund claim.

39

NOT A TRP

if you prepare a return for your employer or if you prepare return as a fiduciary

40

Understatement of taxpayer's liability

against the TRP--- position is unreasonable and no substantial authroity for the position. (Less than 40% chance of being sustained)
positiion is unreasonable and it is disclosed but less than 20% basis for being sustained
if the position is a tax shelter and MLTN to be sustained (Less tha 50%)

41

Disclosure provisions

failure to furnish a copy of the return for the preparer.
failure to sign the return and show identity
failure to furnish preparer's identifying number to IRS
failure to keep copy of the return.

42

Gross overvaluation o f property

over 2 times the actual value

43

Violation of GAAP or GAAS always

establishes negligence to the accountants
vidence of compliance with GAAP and GAAS does not necessarily establish reasonable care.

44

Damages when accountant breaches contract

plaintiff CANNOT recover from careless accountant unless plaintiff has suffered some injury.'

cannot collect damages for injuries caused by contributory negligence
NEVER collect punitive damages with negligence.

45

Plaintiff must prove accountant's negligence directly caused his or her injuries

accountant is liable for his or her negligence if it was a substantial factor in bringing the loss

46

Defenses for negligence case

contributory negligence by the client

47

Fraud

accountant made a false representation of fact. misrepresented fact was material and the acountant knew about it or it was considered reckless (Scienter).
Reckless disregard or GROSS negligence- constructive fraud
accountant intended to and did induce plaintiff's reasonable reliance on misstatement or omission.
CLIENT SUFFERED DAMAGES.

liability to all foreseeable victims in a fraud case
whereas in negligence is more limited in scope.

PUNITIVE AND COMPENSATORY DAMAGES FOR FRUAD

48

Negligence liability to third parties

accountant is liable to limited class of non clients where accountant knows information being supplied to client will be given to limited group of third persons. Information will influence thrid parties specific transaction.

49

Ultamares vs. Touche

accountant is liable only to those with whom they are in PRIVY Of CONTRACT
Foreseen vicitms can recover from the accountant- those expressively stated inthe engagement letter.

50

anti bribery provisions

aimed at preventing US companies from gaining or retaining foreign business by bribing foreign govt officials

51

accounting provisions

aimed specifically at preventing companies from hiding huge bribes on F/S.
companies registered with SEC must keep detailed records which fairly and accurately reflect f/s activities.
fines up to 100k and 5 years in jail for an individual
fines up to 1 million for a corp
CIVIL- max civil fine is 10k.

52

RICO-prevent organized crime's infiltration into legitimate business. criminal and civil actions can be brought against defense.

mail fraud- any lie through the mail
wire fraud- lie told over the phone

53

SOX Criminal Liability

willful failure to retain audit and review work papers. SOX retention is 5 years, -10 years in jail
PCAOB must retain w/p for 7 years.

20 years in jail for destruction of w/p

54

1933 act- 1/3

accountant is liable for part they prepared.
material
plaintiff suffered damages
defenses-
due diligence
lack of reliance
alternative causation
statute of limitations.

55

1934-- 2/5

more than 10 m in assets and 2000 SH

56

RULE 504--- Regulation D

used mostly by small companies- exempt if attempt is to raise $1 mill and have unlimited amount of investors
need to file FORM D with the SEC

57

RULE 505- Regulation D

can be used to raise only $5 million in 12 months
35 unaccredited investors and unlimited accredited investors
must file form D within 15 days

58

Rule 506- Regulation D

no limit on the amount but can only sell to no more than 35 unaccredited investors and must be sophisticated.
must file form D within 15 day.

59

Regulation A

cannot be used by 34 act reporting companies, investment companies or bad boys.
limit of $50 million
"testing the waters"
need 2 years of B/S unaudited..

60

JOBS act of 2012

made it easier for small companies to raise capital with hope that would eventurally lead to creation of jobs.

creation of firms called EGC
encouraged crowdfunding
increased regulation A from $5 mill to $50 million
allowed firms doing private placements to engage in general solicitation and advertising in situations where they could not do so before.
changed definition of public companyin order to allow firms to grow bigger before forced to go public.

61

EMERGING GROWTH COMPANIES

- have less than 1 billion in annual gross revenues
been public for less than 5 years.
have public float of less than 700 million.

only need 2 years of audited F/S instead of 3 with their registration statement.
--reduced disclosure requirments.
exempt for five years in complying with secition 404bof SOX of internal control audit over financial reporting.

62

Crowdfunding

use internet tor aise capital.
raise up to 1 million in 12 months

63

1933 act

must prove-
material misstatement
plaintiff bought securities that were issued during defective registration period.
plaintiff suffered damages

64

Defenses for accountant- 1933

performed due diligence audit
alternative causation
lack of reliance by Plaintiff.
statute of limitations p must sue within 1 year when they discovered false statements or omissions.

calculation of Section 11 damages-
lesser of amount actually paid by Plaintiff or price security was offered to public.

ONLY HAVE TO PROVE NEGLIGENCE, not scienter or causation or reliance on f/s.

65

1934 plaintiffs must prove the following
2 years of when fraud was discovered
5 years if fraudulent

- false statement or omission of MATERIAL fact-
-SCIENTER by defendent
-RELIANCE by plaintiff
-Causation

defenses-
contributory negligence

66

Criminal liability

willful violation of 1933 act is 10k fine and 5 years in jail
willful violation of 1934 is 2.5 million and 20 years in jail.