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Which of the following best describes lapping?

Question 3 options:

-applying cash receipts to a different customer's account in an attempt to conceal previous thefts of funds

-inflating bank balances by transferring money among different bank accounts

-expensing an asset that has been stolen

-creating a false transaction

1 Answer

6 votes

Final answer:

Lapping involves concealing theft by misappropriating cash receipts, a fraudulent act. On a bank balance sheet, not all assets listed are present as liquid cash due to the time mismatch between liabilities and asset repayments. The value of loans in the secondary market can vary depending on the borrower's payment history and fluctuations in economy-wide interest rates.

Step-by-step explanation:

Lapping is best described as applying cash receipts to a different customer's account in an attempt to conceal previous thefts of funds. In a retail scenario, if a cashier's drawer consistently shows a shortage, and theft is suspected, lapping might be used as a deceptive technique to cover up the missing funds. However, this is a fraudulent activity and can lead to serious legal consequences if discovered.

The money listed under assets on a bank balance sheet may not actually be in the bank due to an asset-liability time mismatch. Customers can withdraw a bank's liabilities, like deposits, in the short term while long-term assets like loans are repaid over an extended period. Thus, not all the assets are present as liquid cash in the bank at any given time.

When considering purchasing loans in the secondary market, the value of a loan can fluctuate based on several factors. For instance:

  • If a borrower has been late on loan payments, a bank might pay less for that loan due to the increased risk of default.
  • If overall economy interest rates have risen since the loan was made, the loan's lower interest rate makes it less attractive, thus the bank would pay less for it.
  • If the borrower is a firm with high reported profits, the perceived risk might be lower, making the bank willing to pay more for the loan.
  • Conversely, if economy-wide interest rates have fallen since the loan was issued, a loan with a higher fixed rate becomes more valuable, and a bank might pay more.
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