ch01 - C hapte 1 r Accounting In Action Financial...

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Unformatted text preview: C hapte 1 r Accounting In Action Financial Accounting, Sixth Edition Chapter 1-1 Study Objectives 1. 2. 3. 4. 5. 6. 7. 8. Explain what accounting is. I de ntify theuse and use of accounting. rs s Unde rstand why e thics is a fundam ntal busine conce e ss pt. Explain ge rally acce d accounting principle and thecost principle ne pte s . Explain them tary unit assum one ption and thee conom e ic ntity assum ption. S theaccounting e tate quation, and de asse liabilitie and stockholde fine ts, s, rs' e quity. Analyzethee cts of busine transactions on theaccounting e ffe ss quation. Unde rstand thefour financial state e and how the arepre d. m nts y pare Chapter 1-2 Accounting in Action What is Accounting? Three activities Who uses accounting data The Building Blocks of Accounting Ethics in financial reporting Generally accepted accounting principles Assumptions The Basic Accounting Equation Assets Liabilities Stockholders' equity Using the Basic Accounting Equation Transaction analysis Summary of transactions Financial Statements Income statement Statement of retained earnings Balance sheet Statement of cash flows Chapter 1-3 What is Accounting? The purpose of accounting is to: (1) identify, record, and communicate the identify record economic events of an (2) organization to (3) interested users. Chapter 1-4 SO 1 Explain what accounting is. What is Accounting? Three Activities Illustration 1-1 Accounting proce ss Theaccounting proce includes ss thebookke ping function. e Chapter 1-5 SO 1 Explain what accounting is. What is Accounting? Question: "Bookkeeping and accounting are the same." Do you agree? Explain. Chapter 1-6 What is Accounting? E1-1. Urlacher Company performs the following accounting tasks during the year. _________ Analyzing and interpreting information. _________ Classifying economic events. _________ Explaining uses, meaning, and limitations of data. _________ Keeping a systematic chronological diary of events. _________ Measuring events in dollars and cents. _________ Preparing accounting reports. _________ Reporting information in a standard format. _________ Selecting economic activities relevant to the company. _________ Summarizing economic events. Instructions: Categorize the accounting tasks performed by Urlacher as relating to either the identification (I), recording (R), or communication (C) aspects of accounting. Chapter 1-7 Who Uses Accounting Data? Internal Users Management Human Resources IRS Investors Finance Common Questions Labor Unions Creditors Marketing Customers Chapter 1-8 SEC External Users SO 2 Identify the users and uses of accounting. Who Uses Accounting Data? C m Que om on stions Aske d 1. C weafford to giveour an e ploye s a pay raise m e ? 2. Did thecom pany e a arn satisfactory incom ? e 3. Do wene d to borrow in thene e ar future ? 4. I s cash sufficie to pay divide to the nt nds stockholde rs? 5. What pricefor our product will m izene incom ? axim t e 6. Will thecom pany beableto pay its short-te de rm bts? Chapter 1-9 Use r Hum Re an source s I nve stors Manage e m nt Finance Marke ting C ditors re SO 2 Identify the users and uses of accounting. What Use Accounting Data? Who is Accounting? s E1-2. (a) The following are users of financial statements. _________ Customers _________ Internal Revenue Service _________ Labor unions _________ Marketing manager _________ Production supervisor _________ Securities and Exchange Commission _________ Store manager _________ Suppliers _________ Vice-president of finance Instructions: Identify the users as being either external users or internal users. Chapter 1-10 The Building Blocks of Accounting Ethics In Financial Reporting S tandards of conduct by which one actions arejudge as right or 's d wrong, hone or dishone fair or not fair, areEthics. st st, Re nt financial scandals include Enron, WorldC , ce : om He althS outh, AI G, and othe rs. C ongre passe S ss d arbane s-Oxle Act of 2002. y Effe ctivefinancial re porting de nds on sound e pe thical be havior. Chapter 1-11 SO 3 Understand why ethics is a fundamental business concept. Ethics Re w Que vie stion Ethics arethestandards of conduct by which one actions are 's judge as: d a. right or wrong. b. hone or dishone st st. c. fair or not fair. d. all of the options. se Chapter 1-12 SO 3 Understand why ethics is a fundamental business concept. The Building Blocks of Accounting Various use ne d rs e financial inform ation Financial S m nts tate e BalanceS e he t I ncom S m nt e tate e Re taine Earnings S m nt d tate e S m nt of C Flows tate e ash NoteDisclosure Theaccounting profe ssion has atte pte to de lop a se of m d ve t standards that arege rally ne acce d and unive pte rsally practice d. Generally Accepted Accounting Principles (GAAP) Chapter 1-13 SO 4 Explain generally accepted accounting principles and the cost principle. The Building Blocks of Accounting Organizations Involved in Standard Setting: S curitie and ExchangeC m e s om ission (S EC) http://www.se c.gov/ Financial Accounting S tandards Board (FAS B) http://www.fasb.org/ Inte rnational Accounting S tandards Board (IAS B) http://www.iasb.org/ Chapter 1-14 SO 4 Explain generally accepted accounting principles and the cost principle. The Building Blocks of Accounting Cost Principle (Historical) dictate that companie re s s cord asse at the cost. ts ir I ssue s: Re porte at cost whe purchase and also ove thetim theasse is d n d r e t he ld. C e ost asily ve d, whe as m t valueis ofte subje . rifie re arke n ctive Fair valueinform ation m bem use ay ore ful. Chapter 1-15 SO 4 Explain generally accepted accounting principles and the cost principle. The Building Blocks of Accounting E1-3. Larry Smith, president of Smith Company, has instructed Ron Rivera, the head of the accounting department for Smith Company, to report the company's land in the company's accounting reports at its market value of $170,000 instead of its cost of $100,000. Smith says, "Showing the land at $170,000 will make our company look like a better investment when we try to attract new investors next month." Instructions: Explain the ethical situation involved for Ron Rivera, identifying the stakeholders and the alternatives. Chapter 1-16 Assumptions Monetary Unit Assumption includein theaccounting re cords only transaction data that can bee sse in te s of m y. xpre d rm one Economic Entity Assumption requires that activities of thee ntity beke se pt parateand distinct fromtheactivitie of its owne s r and all othe e r conom e ic ntitie s. Proprie torship. Partne rship. C orporation. Forms of Business Ownership SO 5 Explain the monetary unit assumption and the economic entity assumption. Chapter 1-17 Forms of Business Ownership Proprie torship Ge rally owne by ne d onepe rson. Ofte sm se n all rvice typebusine s sse Owne re ive any r ce s profits, suffe any rs losse and is s, pe rsonally liablefor all de bts. Partne rship Owne by two or m d ore pe rsons. Ofte re and n tail se -typebusine s rvice sse Ge rally unlim d ne ite pe rsonal liability Partne rship agre m nt e e C orporation Owne rship divide d into share of stock s S paratele e e gal ntity organize unde state d r corporation law Lim d liability ite Chapter 1-18 SO 5 Explain the monetary unit assumption and the economic entity assumption. Assumptions Re w Que vie stion Com bining theactivitie of Ke s llogg and Ge ral Mills would ne violatethe a. cost principle . b. e conom e ic ntity assum ption. c. m tary unit assum one ption. d. e thics principle . Chapter 1-19 SO 5 Explain the monetary unit assumption and the economic entity assumption. Forms of Business Ownership Re w Que vie stion A busine organize as a se ss d paratele e gal ntity unde statelaw r having owne rship divide into share of stock is a d s a. proprie torship. b. partne rship. c. corporation. d. soleproprie torship. Chapter 1-20 SO 5 Explain the monetary unit assumption and the economic entity assumption. Assumptions E1-4. The following situations involve accounting principles and assumptions. 1. Grossman Company owns buildings that are worth substantially more than they originally cost. In an effort to provide more relevant information, Grossman reports the buildings at market value in its accounting reports. 2. Jones Company includes in its accounting records only transaction data that can be expressed in terms of money. 3. Caleb Borke, president of Caleb's Cantina, records his personal living costs as expenses of the Cantina. Instructions: For each of the three situations, say if the accounting method used is correct or incorrect. If correct, identify which principle or assumption supports the method used. If incorrect, identify which principle or assumption has been violated. Chapter 1-21 The Basic Accounting Equation = + Stockholders ' Equity Asse ts Liabilities Provide theunderlying framework for re s cording and sum arizing e m conom e nts. ic ve Asse areclaim d by e r cre ts e ithe ditors or owne rs. C s of cre laim ditors m bepaid be owne ust fore rship claim s. Chapter 1-22 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. The Basic Accounting Equation = + Stockholders ' Equity Asse ts Liabilities Provide theunderlying framework for re s cording and sum arizing e m conom e nts. ic ve Asse ts Re source a busine owns. s ss Providefuturese s or be fits. rvice ne C S ash, upplie Equipm nt, e s, e tc. Chapter 1-23 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. The Basic Accounting Equation = + Stockholders ' Equity Asse ts Liabilities Provide theunderlying framework for re s cording and sum arizing e m conom e nts. ic ve Liabilitie s C s against asse (de and obligations). laim ts bts C ditors - party to whomm y is owe re one d. Accounts payable Note payable e , s , tc. Chapter 1-24 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. The Basic Accounting Equation = + Stockholders ' Equity Asse ts Liabilities Provide theunderlying framework for re s cording and sum arizing e m conom e nts. ic ve S tockholde Equity rs' Owne rship claimon total asse ts. Re rre to as re fe d sidual e quity. Paid-in C apital, Re taine Earnings (C d orporation). Chapter 1-25 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. The Basic Accounting Equation BE1-3. At the beginning of the year, Hernandez Company had total assets of $800,000 and total liabilities of $500,000. Answer the following questions. (a) If total assets increased $150,000 during the year and total liabilities decreased $80,000, what is the amount of stockholders' equity at the end of the year? (b) During the year, total liabilities increased $100,000 and stockholders' equity decreased $70,000. What is the amount of total assets at the end of the year? (c) If total assets decreased $80,000 and stockholders' equity increased $120,000 during the year, what is the amount of total liabilities at the end of the year? Chapter 1-26 Stockholders' Equity Illustration 1-6 Revenues re frombusine activitie e re into for thepurposeof sult ss s nte d e arning incom . e C m source of re nueare sale fe s, se s, com issions, inte st, om on s ve : s, e rvice m re divide royaltie and re nds, s, nt. Chapter 1-27 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. Stockholders' Equity Illustration 1-6 Expenses arethecost of asse consum d or se s use in theproce of ts e rvice d ss e arning re nue ve . C m e nse are salarie e nse re e nse utilitie e nse tax om on xpe s : s xpe , nt xpe , s xpe , e nse e xpe , tc. Chapter 1-28 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. Stockholders' Equity Illustration 1-6 Dividends arethedistribution of cash or othe asse to stockholde r ts rs. Divide re nds ducere taine e d arnings, howe r divide arenot an e nse ve nds xpe . Chapter 1-29 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. Stockholders' Equity Chapter 1-30 The Basic Accounting Equation E1-5B Muhammed Cleaners has the following balance sheet items. Accounts payable Accounts receivable Cash Notes payable Cleaning equipment Rent payable Cleaning supplies Common stock Instructions: classify each item as an asset, liability, or stockholders' equity. Chapter 1-31 Using The Basic Accounting Equation Transactions are a business's economic events re corde by accountants. d May bee rnal or inte (for e ple xte rnal xam ?). Not all activitie re se transactions. s pre nt Each transaction has a dual effect on the accounting equation. Chapter 1-32 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions Question: Are the following events recorded in the accounting records? Event S upplie are s purchase on d account. An e ploye is m e hire d. Divide arepaid nds to stockholde rs'. Criterion I s thefinancial position (asse liabilitie or stockholde ts, s, rs' e quity) of thecom pany change d? Record/ Don't Record Chapter 1-33 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions Discussion Question Q18. In Fe bruary 2008, Paula King inve d an additional ste $10,000 in Hardy C pany. Hardy's accountant, LanceJone om s, re corde this re ipt as an incre in cash and re nue I s this d ce ase ve s. tre e appropriate Why or why not? atm nt ? S enote pagefor discussion e s Chapter 1-34 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions E1-6B Selected transactions for Natural Lawn Care Company are listed below. 1. Made cash investment to start business. 2. Purchased equipment on account. 3. Paid salaries. 4. Billed customers for services performed. 5. Received cash from customers billed in (4). 6. Paid cash dividends. 7. Incurred advertising expense on account. 8. Purchased additional equipment for cash. 9. Received cash from customers when service was performed. Instructions: list the numbers of the above transactions and describe the effect of each transaction on assets, liabilities, and stockholders' equity. For example, the first answer is: (1) Increase in assets and increase in stockholders' equity. Chapter 1-35 Transactions (Problem) P1-1A: Barone's Repair Shop was started on May. Prepare a tabular analysis of the following transactions for the month of May. 1. Stockholders invested $10,000 cash to start the repair shop. Assets Cash 1. +10,000 Liabilities Stockholders' Equity Accounts Accounts Common + Receivable + Equipment = Payable + Stock +10,000 Investment Chapter 1-36 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) 2. Purchased equipment for $5,000 cash. Assets Cash 1. +10,000 2. -5,000 +5,000 Liabilities Stockholders' Equity Accounts Accounts Common + Receivable + Equipment = Payable + Stock +10,000 Investment Chapter 1-37 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) 3. Paid $400 cash for May office rent. Assets Cash 1. +10,000 2. 3. -5,000 -400 +5,000 -400 Expense Liabilities Stockholders' Equity Accounts Accounts Common Retained + Receivable + Equipment = Payable + Stock + Earnings +10,000 Chapter 1-38 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) 4. Received $5,100 from customers for repair service. Assets Cash 1. +10,000 2. 3. 4. -5,000 -400 +5,100 +5,000 -400 +5,100 Revenue Liabilities Stockholders' Equity Accounts Accounts Common Retained + Receivable + Equipment = Payable + Stock + Earnings +10,000 Chapter 1-39 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) 5. Paid dividends of $1,000 cash. Assets Cash 1. +10,000 2. 3. 4. 5. -5,000 -400 +5,100 -1,000 +5,000 -400 +5,100 -1,000 Liabilities Stockholders' Equity Accounts Accounts Common Retained + Receivable + Equipment = Payable + Stock + Earnings +10,000 Chapter 1-40 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) 6. Paid part-time employee salaries of $2,000. Assets Cash 1. +10,000 2. 3. 4. 5. 6. -5,000 -400 +5,100 -1,000 -2,000 +5,000 -400 +5,100 -1,000 -2,000 Expense Liabilities Stockholders' Equity Accounts Accounts Common Retained + Receivable + Equipment = Payable + Stock + Earnings +10,000 Chapter 1-41 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) 7. Incurred $250 of advertising costs, on account. Assets Cash 1. +10,000 2. 3. 4. 5. 6. 7. -5,000 -400 +5,100 -1,000 -2,000 +250 +5,000 -400 +5,100 -1,000 -2,000 -250 Expense Liabilities Stockholders' Equity Accounts Accounts Common Retained + Receivable + Equipment = Payable + Stock + Earnings +10,000 Chapter 1-42 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) 8. Provided repair services on account to customers $750. Assets Cash 1. +10,000 2. 3. 4. 5. 6. 7. 8. -5,000 -400 +5,100 -1,000 -2,000 +250 +750 +5,000 -400 +5,100 -1,000 -2,000 -250 +750 Revenue Chapter 1-43 Liabilities Stockholders' Equity Accounts Accounts Common Retained + Receivable + Equipment = Payable + Stock + Earnings +10,000 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) 9. Collected $120 cash for services previously billed. Assets Cash 1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. +120 6,820 + -5,000 -400 +5,100 -1,000 -2,000 +250 +750 -120 630 + 5,000 = SO 7 Liabilities Stockholders' Equity Accounts Accounts Common Retained + Receivable + Equipment = Payable + Stock + Earnings +10,000 +5,000 -400 +5,100 -1,000 -2,000 -250 +750 10,000 + 2,200 250 + Chapter 1-44 Analyze the effects of business transactions on the accounting equation. Financial Statements Companies prepare four financial statements from the summarized accounting data: Income Statement Retained Earnings Statement Balance Sheet Statement of Cash Flows Chapter 1-45 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Income Statement Barone's Repair Shop I ncome St at ement For t he Mont h Ended May 31, 2007 Revenues: Ser vice r evenue Expenses: Salar y expense Rent ex pense Adver t ising expense Tot al expenses Net income Chapter 1-46 Reports the revenues and expenses for a specific period of time. Net income revenues exceed expenses. Net loss expenses exceed revenues. $ 5,850 2,000 400 250 2,650 $ 3, 200 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Income Statement Barone's Repair Shop I ncome St at ement For t he Mont h Ended May 31, 2007 Revenues: Ser vice r evenue Expenses: Salar y expense Rent ex pense Adver t ising expense Tot al expenses Net income Chapter 1-47 Retained Earnings Statement Bar one's Repair Shop Ret ained Ear nings St at ement For t he Mont h Ended May 31, 2007 Ret ained ear nings, May 1 $ 3, 200 (1,000) $ 2,200 $ 5,850 2,000 400 250 2,650 Add: Net income Less: Dividends Ret ained ear nings, May 31 $ 3, 200 Net income is needed to determine the ending balance in retained earnings. SO 8 Understand the four financial statements and how they are prepared. Financial Statements Retained Earnings Statement Statement indicates the reasons why retained earnings has increased or decreased during the period. Bar one's Repair Shop Ret ained Ear nings St at ement For t he Mont h Ended May 31, 2007 Ret ained ear nings, May 1 Add: Net income Less: Dividends Ret ained ear nings, May 31 $ $ 3, 200 (1,000) 2,200 Chapter 1-48 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Balance Sheet Bar one's Repair Shop Balance Sheet May 31, 2007 Asset s Cash Account s r eceivable Equipment Tot al asset s Liabilit ies Account s payable St ockholder s' Equit y Common st ock Ret ained ear nings Tot al liab. & equit y Chapter 1-49 Retained Earnings Statement Bar one's Repair Shop Ret ained Ear nings St at ement $ 6,820 630 5,000 For t he Mont h Ended May 31, 2007 Ret ained ear nings, May 1 Add: Net income Less: Dividends Ret ained ear nings, May 31 $ $ 3, 200 (1,000) 2,200 $ 12,450 $ 250 10,000 2, 200 $ 12,450 The ending balance in retained earnings is needed in preparing the balance sheet. SO 8 Understand the four financial statements and how they are prepared. Financial Statements Balance Sheet Bar one's Repair Shop Balance Sheet May 31, 2007 Asset s Cash Account s r eceivable Equipment Tot al asset s Liabilit ies Account s payable St ockholder s' Equit y Common st ock Ret ained ear nings Tot al liab. & equit y Chapter 1-50 $ 6,820 630 5,000 Reports the assets, liabilities, and stockholders' equity at a specific date. Assets listed at the top, followed by liabilities and stockholders' equity. Total assets must equal total liabilities and stockholders' equity. $ 12,450 $ 250 10,000 2, 200 $ 12,450 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Balance Sheet Bar one's Repair Shop Balance Sheet May 31, 2007 Asset s Cash Account s r eceivable Equipment Tot al asset s Liabilit ies Account s payable St ockholder s' Equit y Common st ock Ret ained ear nings Tot al liab. & equit y Chapter 1-51 Statement of Cash Flows Barone's Repair Shop St at ement of Cash Flows For t he Mont h Ended May 31, 2007 Cash f low f rom Operat ions Cash r eceipt s f r om cust omer s Cash paid f or ex penses Cash pr ovided by oper at ions Cash f low f rom I nvest ing Pur chase of equipment Cash f low f rom Financing I nvest ment by owner s Dr awings by owner s Cash pr ovided by f inancing Net increase in cash Cash balance, May 1 Cash balance, May 31 $ $ 5,220 (2,400) 2,820 (5,000) 10,000 (1,000) 9,000 6,820 6, 820 $ 6,820 630 5,000 $ 12,450 $ 250 10,000 2, 200 $ 12,450 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Information for a specific period of time. Answers the following: 1. Whe did cash com from re e ? 2. What was cash use for? d 3. What was thechangein the Statement of Cash Flows Barone's Repair Shop St at ement of Cash Flows For t he Mont h Ended May 31, 2007 Cash f low f rom Operat ions Cash r eceipt s f r om cust omer s Cash paid f or ex penses Cash pr ovided by oper at ions Cash f low f rom I nvest ing Pur chase of equipment Cash f low f rom Financing I nvest ment by owner s Dr awings by owner s Cash pr ovided by f inancing Net increase in cash Cash balance, May 1 Cash balance, May 31 $ $ 5,220 (2,400) 2,820 (5,000) 10,000 (1,000) 9,000 6,820 6,820 cash balance ? Chapter 1-52 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Re w Que vie stion Ne incom will re during a tim pe whe t e sult e riod n: a. asse e e liabilitie ts xce d s. b. asse e e re nue ts xce d ve s. c. e nse e e re nue xpe s xce d ve s. d. re nue e e e nse ve s xce d xpe s. Chapter 1-53 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Re w Que vie stion Which of thefollowing financial state e is pre d as of a m nts pare spe date cific ? a. Balanceshe t. e b. Incom state e e m nt. c. S m nt of stockholde e tate e rs' quity. d. S m nt of cash flows. tate e Chapter 1-54 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Discussion Question Q19. "A com pany's ne incom appe dire on theincom t e ars ctly e state e and there m nt taine e d arnings state e and it is include m nt, d indire in thecom ctly pany's balanceshe t." Do you agre ? e e Explain. S enote pagefor discussion e s Chapter 1-55 SO 8 Understand the four financial statements and how they are prepared. Transactions and Financial Statements P1-4C Michelle Rodriguez started her own consulting firm, Rodriguez Consulting, on May 1,2008.The following transactions occurred during the month of May. May 1 Michelle invested $7,000 cash in the business. 2 Paid $900 for office rent for the month. 3 Purchased $600 of supplies on account. 5 Paid $125 to advertise in the County News. 9 Received $4,000 cash for services provided. 12 Paid a $1,000 cash dividend. 15 Performed $6,400 of services on account. 17 Paid $2,500 for employee salaries. 20 Paid for the supplies purchased on account on May 3. 23 Received a cash payment of $4,000 for services provided on account on May 15. 26 Borrowed $5,000 from the bank on a note payable. 29 Purchased office equipment for $3,100 on account. 30 Paid $175 for utilities. Chapter 1-56 Transactions and Financial Statements Instructions (a) Show the effects of the previous transactions on the accounting equation (b) Prepare an income statement for the month of May. (c) Prepare a balance sheet at May 31, 2008. Chapter 1-57 ...
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This note was uploaded on 10/25/2008 for the course ACCT 2101 taught by Professor Sweeney during the Spring '08 term at CUNY Baruch.

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