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Giáo trình financial accounting IFRS edtion 3e by kieso


Jerry J. Weygandt PhD, CPA
University of Wisconsin—Madison
Madison, Wisconsin

Paul D. Kimmel PhD, CPA
University of Wisconsin—Milwaukee
Milwaukee, Wisconsin

Donald E. Kieso PhD, CPA
Northern Illinois University
DeKalb, Illinois


ACCOUNT CLASSIFICATION AND PRESENTATION
Account Title

Classification

Financial Statement


Normal
Balance

A
Accounts Payable
Accounts Receivable

Current Liability
Current Asset

Statement of Financial Position
Statement of Financial Position

Credit
Debit

Accumulated Depreciation—
Buildings

Plant Asset—Contra

Statement of Financial Position

Credit

Accumulated Depreciation—
Equipment

Plant Asset—Contra

Statement of Financial Position

Credit

Administrative Expenses

Operating Expense

Income Statement

Debit

Advertising Expense

Operating Expense

Income Statement

Debit

Allowance for Doubtful Accounts

Current Asset—Contra

Statement of Financial Position

Credit

Amortization Expense

Operating Expense

Income Statement

Debit

Bad Debt Expense

Operating Expense

Income Statement

Debit

B
Bonds Payable

Non-Current Liability

Statement of Financial Position

Credit

Buildings

Plant Asset

Statement of Financial Position

Debit

Cash

Current Asset

Statement of Financial Position

Debit

C
Copyrights

Intangible Asset

Statement of Financial Position

Debit

Cost of Goods Sold

Cost of Goods Sold

Income Statement

Debit

Debt Investments

Current Asset/Long-Term
Investment

Statement of Financial Position

Debit

Depreciation Expense

Operating Expense

Income Statement

Debit

Dividend Revenue

Other Income and Expense

Income Statement

Credit

Dividends

Temporary account closed
to Retained Earnings

Retained Earnings
Statement

Debit

Dividends Payable

Current Liability

Statement of Financial Position

Credit

Statement of Financial Position

Debit

Income Statement

Debit

D

E
Equipment

Plant Asset

F
Freight-Out

Operating Expense

G
Gain on Disposal of Plant Assets

Other Income and Expense

Income Statement

Credit

Goodwill

Intangible Asset

Statement of Financial Position

Debit

Income Summary

Temporary account closed
to Retained Earnings

Not Applicable

(1)

Income Tax Expense

Income Tax Expense

Income Statement

Debit

Income Taxes Payable

Current Liability

Statement of Financial Position

Credit

Insurance Expense

Operating Expense

Income Statement

Debit

Interest Expense

Other Income and Expense

Income Statement

Debit

Interest Payable

Current Liability

Statement of Financial Position

Credit

Interest Receivable

Current Asset

Statement of Financial Position

Debit

I

Interest Revenue

Other Income and Expense

Income Statement

Credit

Inventory

Current Asset

Statement of Financial Position (2)

Debit


Account Title

Classification

Financial Statement

Normal
Balance

Statement of Financial Position

Debit

Income Statement

Debit

L
Land

Plant Asset

Loss on Disposal of Plant Assets

Other Income and Expense

M
Maintenance and Repairs Expense

Operating Expense

Income Statement

Debit

Mortgage Payable

Non-Current Liability

Statement of Financial Position

Credit

Statement of Financial Position

Credit

N
Notes Payable

Current Liability/
Non-Current Liability

P
Patents

Intangible Asset

Statement of Financial Position

Debit

Prepaid Insurance

Current Asset

Statement of Financial Position

Debit

Rent Expense

Operating Expense

Income Statement

Debit

Research and Development Expense

Operating Expense

Income Statement

Debit

Retained Earnings

Equity

Statement of Financial Position
and Retained Earnings Statement

Credit

Salaries and Wages Expense

Operating Expense

Income Statement

Debit

Salaries and Wages Payable

Current Liability

Statement of Financial Position

Credit

Sales Discounts

Revenue—Contra

Income Statement

Debit

R

S

Sales Returns and Allowances

Revenue—Contra

Income Statement

Debit

Sales Revenue

Revenue

Income Statement

Credit

Selling Expenses

Operating Expense

Income Statement

Debit

Service Revenue

Revenue

Income Statement

Credit

Share Capital—Ordinary

Equity

Statement of Financial Position

Credit

Share Capital—Preference

Equity

Statement of Financial Position

Credit

Share Investments

Current Asset/Long-Term
Investment

Statement of Financial Position

Debit

Share Premium—Ordinary

Equity

Statement of Financial Position

Credit

Share Premium—Preference

Equity

Statement of Financial Position

Credit

Supplies

Current Asset

Statement of Financial Position

Debit

Supplies Expense

Operating Expense

Income Statement

Debit

Statement of Financial Position

Debit

T
Treasury Shares

Equity—Contra

U
Unearned Service Revenue

Current Liability

Statement of Financial Position

Credit

Utilities Expense

Operating Expense

Income Statement

Debit

(1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss. The
Income Summary account does not appear on any financial statement.
(2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cost of goods sold.


The following is a sample chart of accounts. It does not represent a comprehensive chart of all the accounts used in
this textbook but rather those accounts that are commonly used. This sample chart of accounts is for a company that
generates both service revenue as well as sales revenue. It uses the perpetual approach to inventory. If a periodic
system was used, the following temporary accounts would be needed to record inventory purchases: Purchases,
Freight-In, Purchase Returns and Allowances, and Purchase Discounts.

CHART OF ACCOUNTS
Assets

Liabilities

Equity

Revenues

Expenses

Cash

Notes Payable

Share Capital—
Preference

Service Revenue

Administrative
Expenses

Accounts
Receivable

Accounts Payable

Allowance for
Doubtful
Accounts
Interest
Receivable

Unearned Service
Revenue
Salaries and
Wages Payable
Interest Payable

Sales Revenue
Share Capital—
Ordinary

Sales Discounts

Share Premium—
Preference

Sales Returns and
Allowances

Share Premium—
Ordinary

Interest Revenue

Amortization
Expense
Bad Debt Expense
Cost of Goods Sold

Inventory

Dividends Payable

Retained Earnings

Supplies

Income Taxes
Payable

Treasury Shares

Gain on Disposal
of Plant Assets

Depreciation
Expense
Freight-Out

Prepaid Insurance

Dividends

Income Tax
Expense

Income Summary

Insurance Expense

Bonds Payable
Land
Mortgage Payable
Equipment

Interest Expense

Accumulated
Depreciation—
Equipment

Loss on Disposal of
Plant Assets

Buildings
Accumulated
Depreciation—
Buildings

Maintenance and
Repairs Expense
Rent Expense
Salaries and Wages
Expense

Copyrights
Selling Expenses
Goodwill
Supplies Expense
Patents
Utilities Expense


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Library of Congress Cataloging-in-Publication Data
Weygandt, Jerry J.
Financial accounting : IFRS / Jerry J. Weygandt, Paul D. Kimmel, Donald E.
Kieso. — 3rd edition.
pages cm
Includes index.
ISBN 978-1-118-97808-5 (cloth)
1. Accounting. 2. Accounting—Standards. 3. International business
enterprises—Accounting—Standards I. Kimmel, Paul D. II. Kieso, Donald E.
III. Title.
HF5635.W52423 2015
657.02’18—dc23
2015022964
ISBN-13 978-1-118-97808-5
The inside back cover will contain printing identification and country of origin if omitted from this page. In addition, if
the ISBN on the back cover differs from the ISBN on this page, the one on the back cover is correct.
Printed in Asia
10 9 8 7 6 5 4 3 2 1


Brief Contents
1
2
3
4
5
6
7
8
9
10
11
12
13
14

Accounting in Action 2
The Recording Process 52
Adjusting the Accounts 100
Completing the Accounting Cycle 160
Accounting for Merchandising Operations 218
Inventories 276
Fraud, Internal Control, and Cash 328
Accounting for Receivables 382
Plant Assets, Natural Resources,
and Intangible Assets 426
Liabilities 480
Corporations: Organization, Share Transactions,
Dividends, and Retained Earnings 536
Investments 598
Statement of Cash Flows 644
Financial Statement Analysis 710

APPENDICES
A
B
C
D
E
F
*G
*H
*I

Specimen Financial Statements: TSMC, Ltd. A-1
Specimen Financial Statements: Nestlé SA B-1
Specimen Financial Statements: Petra Foods Limited
Specimen Financial Statements: Apple Inc. D-1
Time Value of Money E-1
Accounting for Partnerships F-1
Subsidiary Ledgers and Special Journals G-1
Other Significant Liabilities H-1
Payroll Accounting I-1

C-1

*Available at the book's companion website, www.wiley.com/college/
weygandt.

iii


From the Authors
Dear Student,
Why This Course? Remember your biology course in high school? Did you have one
of those “invisible man” models (or maybe something more high-tech than that) that
gave you the opportunity to look “inside” the human body? This accounting course
offers something similar. To understand a business, you have to understand the financial
insides of a business organization. An accounting course will help you understand
the essential financial components of businesses. Whether you are looking at a large
multinational company like TSMC or Apple or a single-owner software consulting business
or coffee shop, knowing the fundamentals of accounting will help you understand
what is happening. As an employee, a manager, an investor, a business owner, or a
director of your own personal finances—any of
which roles you will have at some point in your
“Whether you are looking at a large
life—you will make better decisions for having
multinational company like TSMC
taken this course.
Why This Book? Thousands of students have
used this textbook. Your instructor has chosen it
for you because of its trusted reputation. The
authors have worked hard to keep the book fresh,
timely, and accurate.

or Apple or a single-owner software
consulting business or coffee shop,
knowing the fundamentals of
accounting will help you understand
what is happening.”

How to Succeed? We've asked many students and many instructors whether there is
a secret for success in this course. The nearly unanimous answer turns out to be not
much of a secret: “Do the homework.” This is one course where doing is learning. The
more time you spend on the homework assignments—using the various tools that this
textbook provides—the more likely you are to learn the essential concepts, techniques,
and methods of accounting. Besides the textbook itself, WileyPLUS and the book's
companion website also offers various support resources.
Good luck in this course. We hope you enjoy the experience and that you put to good
use throughout a lifetime of success the knowledge you obtain in this course. We are
sure you will not be disappointed.
Jerry J. Weygandt
Paul D. Kimmel
Donald E. Kieso

iv


Author Commitment

Kimmel

Jerry Weygandt

Paul

JERRY J. WEYGANDT, PhD, CPA, is Arthur
Andersen Alumni Emeritus Professor of
Accounting at the University of Wisconsin—
Madison. He holds a Ph.D. in accounting from
the University of Illinois. Articles by Professor
Weygandt have appeared in the Accounting
Review, Journal of Accounting Research,
Accounting Horizons, Journal of Accountancy,
and other academic and professional journals.
These articles have examined such financial
reporting issues as accounting for price-level
adjustments, pensions, convertible securities,
stock option contracts, and interim reports.
Professor Weygandt is author of other accounting and financial reporting books and
is a member of the American Accounting
Association, the American Institute of Certified
Public Accountants, and the Wisconsin Society
of Certified Public Accountants. He has served
on numerous committees of the American
Accounting Association and as a member of
the editorial board of the Accounting Review;
he also has served as President and SecretaryTreasurer of the American Accounting Association. In addition, he has been actively involved
with the American Institute of Certified Public
Accountants and has been a member of the
Accounting Standards Executive Committee
(AcSEC) of that organization. He has served on
the FASB task force that examined the reporting issues related to accounting for income
taxes and served as a trustee of the Financial
Accounting Foundation. Professor Weygandt
has received the Chancellor's Award for Excellence in Teaching and the Beta Gamma Sigma
Dean's Teaching Award. He is on the board of
directors of M & I Bank of Southern Wisconsin.
He is the recipient of the Wisconsin Institute of
CPA's Outstanding Educator's Award and the
Lifetime Achievement Award. In 2001 he received the American Accounting Association's
Outstanding Educator Award.

PAUL D. KIMMEL, PhD, CPA, received his
bachelor's degree from the University of
Minnesota and his doctorate in accounting
from the University of Wisconsin. He is an
Associate Professor at the University of
Wisconsin—Milwaukee, and has public
accounting experience with Deloitte & Touche
(Minneapolis). He was the recipient of the
UWM School of Business Advisory Council
Teaching Award, the Reggie Taite Excellence
in Teaching Award and a three-time winner of
the Outstanding Teaching Assistant Award
at the University of Wisconsin. He is also a
recipient of the Elijah Watts Sells Award for
Honorary Distinction for his results on the
CPA exam. He is a member of the American
Accounting Association and the Institute of
Management Accountants and has published
articles in Accounting Review, Accounting
Horizons, Advances in Management Accounting,
Managerial Finance, Issues in Accounting
Education, Journal of Accounting Education,
as well as other journals. His research interests
include accounting for financial instruments
and innovation in accounting education. He
has published papers and given numerous
talks on incorporating critical thinking into
accounting education, and helped prepare a
catalog of critical thinking resources for the
Federated Schools of Accountancy.

Don

Kieso

DONALD E. KIESO, PhD, CPA, received his
bachelor's degree from Aurora University
and his doctorate in accounting from the
University of Illinois. He has served as chairman
of the Department of Accountancy and is
currently the KPMG Emeritus Professor of
Accountancy at Northern Illinois University.
He has public accounting experience with
Price Waterhouse & Co. (San Francisco
and Chicago) and Arthur Andersen & Co.
(Chicago) and research experience with the
Research Division of the American Institute
of Certified Public Accountants (New York).
He has done post doctorate work as a Visiting
Scholar at the University of California at
Berkeley and is a recipient of NIU's Teaching
Excellence Award and four Golden Apple
Teaching Awards. Professor Kieso is the
author of other accounting and business
books and is a member of the American
Accounting Association, the American
Institute of Certified Public Accountants, and
the Illinois CPA Society. He has served as a
member of the Board of Directors of the
Illinois CPA Society, then AACSB's Accounting
Accreditation Committees, the State of
Illinois Comptroller's Commission, as SecretaryTreasurer of the Federation of Schools of
Accountancy, and as Secretary-Treasurer of
the American Accounting Association. Professor
Kieso is currently serving on the Board of
Trustees and Executive Committee of Aurora
University, as a member of the Board of
Directors of Kishwaukee Community Hospital,
and as Treasurer and Director of Valley West
Community Hospital. From 1989 to 1993 he
served as a charter member of the national
Accounting Education Change Commission.
He is the recipient of the Outstanding
Accounting Educator Award from the Illinois
CPA Society, the FSA’s Joseph A. Silvoso Award
of Merit, the NIU Foundation’s Humanitarian
Award for Service to Higher Education, a
Distinguished Service Award from the Illinois
CPA Society, and in 2003 an honorary
doctorate from Aurora University.


Practice Made Simple
The Team for Success is focused on helping students get the most out of their
accounting course by making practice simple. Both in the printed text and the
online environment of WileyPLUS, new opportunities for self-guided practice
allow students to check their knowledge of accounting concepts, skills, and
problem-solving techniques as they receive individual feedback at the question,
learning objective, and course level.

Personalized Practice
Based on cognitive science, WileyPLUS with ORION is a personalized, adaptive
learning experience that gives students the practice they need to build
proficiency on topics while using their study time most effectively. The
adaptive engine is powered by hundreds of unique questions per chapter,
giving students endless opportunities for practice throughout the course.


untingForReceivables.indd Page 406 5/9/15 3:14 PM f-w-204a

/208/WB01590/9781118978085/ch08/text_s

Review and Practice
A new section in the text and in WileyPLUS offers students more opportunities for self-guided practice.

1. (a)

Dec. 31

Bad Debt Expense
Accounts Receivable—M. Jack

(b) (1) Dec. 31

Bad Debt Expense
[($850,000 − $30,000) × 1.5%]
Allowance for Doubtful
Accounts

(2) Dec. 31

(c) (1) Dec. 31

(2) Dec. 31

Bad Debt Expense
Allowance for Doubtful Accounts
[($150,000 × 10%) − $2,400]
Bad Debt Expense
[($850,000 − $30,000) × 0.75%]
Allowance for Doubtful
Accounts
Bad Debt Expense
Allowance for Doubtful Accounts
[($150,000 × 6%) + $200]

In the text, the new Review and Practice
section includes:

1,500
1,500
12,300
12,300
12,600
12,600





6,150
6,150
9,200
9,200

In WileyPLUS, the new practice assignments
include several Do It! Reviews, Brief Exercises,
Exercises, and Problems, giving students the
opportunity to check their work or see the
answer and solution after their final attempt.




Learning Objectives Review
Glossary Review
Practice Multiple-Choice Questions
and Solutions
Practice Exercises and Solutions
Practice Problem and Solution


What’s New?
WileyPLUS with ORION
Several thousand new questions are available for practice and review. WileyPLUS with Orion is an adaptive study and
practice tool that helps students build proficiency in course topics.

Updated Content and Design
We scrutinized all chapter material to find new ways to engage students and help them learn accounting concepts.
Homework problems were updated in all chapters.
The learning objective structure helps students practice their understanding of concepts with DO IT! exercises before
they move on to different topics in other learning objectives. Coupled with a new interior design and revised infographics,
the outcomes-oriented approach motivates students and helps them make the best use of their time.

Student Practice and Solutions
New practice opportunities with solutions are integrated throughout the textbook and WileyPLUS course. Each textbook chapter now provides students with a Review and Practice section that includes learning objective summaries,
glossary review, multiple-choice questions with feedback for each answer choice, and both practice exercises and
problems with detailed solutions.
In WileyPLUS, two brief exercises, two DO IT! exercises, two exercises, and a new problem are available for practice
with each chapter. These new practice questions are algorithmic, providing students with multiple opportunities for
advanced practice.

Real World Context
We expanded our practice of using numerous examples of real companies throughout the textbook. New financial
reporting problems in each chapter require students to analyze the financial statements of TSMC, Nestlé, Petra Foods,
and Apple. In WileyPLUS, real-world Insight boxes now have questions that can be assigned as homework.

A Look at U.S. GAAP
This end-of-chapter section offers Key Points, Similarities, and Differences to help students compare IFRS with U.S.
GAAP. Assessment material is also provided to test students’ understanding.

Excel
New Excel skill videos help students understand Excel features they can apply in their accounting studies.

More information about the Third Edition is available on the book’s website at www.wiley.com/college/weygandt.

viii


Table of Contents
Chapter 1

Accounting in Action

Chapter 3

2

Adjusting the Accounts

Knowing the Numbers 2
What Is Accounting? 4
Three Activities 4
Who Uses Accounting Data? 5
The Building Blocks of Accounting 7
Ethics in Financial Reporting 7
Accounting Standards 8
Measurement Principles 8
Assumptions 9
The Basic Accounting Equation 12
Assets 12
Liabilities 12
Equity 13
Using the Accounting Equation 14
Transaction Analysis 15
Summary of Transactions 20
Financial Statements 22
Income Statement 22
Retained Earnings Statement 24
Statement of Financial Position 24
Statement of Cash Flows 25
Comprehensive Income Statement 25
APPENDIX 1A: Accounting Career Opportunities 27
Public Accounting 27
Private Accounting 28
Governmental Accounting 28
Forensic Accounting 28
A Look at U.S. GAAP 49

Chapter 2

The Recording Process

100

What Was Your Profit? 100
Timing Issues 102
Fiscal and Calendar Years 102
Accrual- versus Cash-Basis Accounting 102
Recognizing Revenues and Expenses 103
The Basics of Adjusting Entries 104
Types of Adjusting Entries 105
Adjusting Entries for Deferrals 106
Adjusting Entries for Accruals 113
Summary of Basic Relationships 118
The Adjusted Trial Balance and
Financial Statements 121
Preparing the Adjusted Trial Balance 121
Preparing Financial Statements 122
APPENDIX 3A: Alternative Treatment of Prepaid
Expenses and Unearned Revenues 124
Prepaid Expenses 125
Unearned Revenues 126
Summary of Additional Adjustment
Relationships 127
APPENDIX 3B: Concepts in Action 128
Qualities of Useful Information 128
Assumptions in Financial Reporting 128
Principles in Financial Reporting 129
Cost Constraint 130
A Look at U.S. GAAP 157

Chapter 4

Completing the Accounting Cycle

52

Accidents Happen 52
The Account 54
Debits and Credits 54
Equity Relationships 58
Summary of Debit/Credit Rules 58
Steps in the Recording Process 59
The Journal 60
The Ledger 62
Posting 63
The Recording Process Illustrated 65
Summary Illustration of Journalizing and
Posting 71
The Trial Balance 72
Limitations of a Trial Balance 73
Locating Errors 73
Currency Signs and Underlining 74
A Look at U.S. GAAP 97

160

Speaking the Same Language 160
Using a Worksheet 162
Steps in Preparing a Worksheet 163
Preparing Financial Statements from
a Worksheet 165
Preparing Adjusting Entries from a
Worksheet 167
Closing the Books 167
Preparing Closing Entries 168
Posting Closing Entries 170
Preparing a Post-Closing Trial Balance 171
Summary of the Accounting Cycle 174
Reversing Entries—An Optional Step 175
Correcting Entries—An Avoidable Step 175
The Classified Statement of Financial
Position 178
Intangible Assets 178
Property, Plant, and Equipment 180
Long-Term Investments 180

ix


Current Assets 180
Equity 182
Non-Current Liabilities 182
Current Liabilities 182
APPENDIX 4A: Reversing Entries 184
Reversing Entries Example 184
A Look at U.S. GAAP 214

Chapter 5

Accounting for Merchandising
Operations 218
Who Doesn't Shop? 218
Merchandising Operations 220
Operating Cycles 220
Flow of Costs 221
Recording Purchases of Merchandise 223
Freight Costs 225
Purchase Returns and Allowances 226
Purchase Discounts 226
Summary of Purchasing Transactions 227
Recording Sales of Merchandise 228
Sales Returns and Allowances 229
Sales Discounts 230
Completing the Accounting Cycle 231
Adjusting Entries 232
Closing Entries 232
Summary of Merchandising Entries 233
Forms of Financial Statements 234
Income Statement 234
Income Statement Presentation of Sales 234
Inventory Presentation in the Classified Statement
of Financial Position 238
APPENDIX 5A: Worksheet for a Merchandising
Company 240
Using a Worksheet 240
APPENDIX 5B: Periodic Inventory System 241
Determining Cost of Goods Sold Under
a Periodic System 241
Recording Merchandise Transactions 242
Recording Purchases of Merchandise 243
Recording Sales of Merchandise 244
Journalizing and Posting Closing Entries 244
Using a Worksheet 246
A Look at U.S. GAAP 273

Chapter 6

Inventories

Chapter 7

Fraud, Internal Control, and Cash

276

328

Minding the Money at Nick's 328
Fraud and Internal Control 330
Fraud 330
Internal Control 330
Principles of Internal Control Activities 331
Limitations of Internal Control 338
Cash Controls 339
Cash Receipts Controls 339
Cash Disbursements Controls 342
Petty Cash Fund Controls 343
Control Features: Use of a Bank 347
Making Bank Deposits 347
Writing Checks 347
Bank Statements 348
Reconciling the Bank Account 350
Electronic Funds Transfer (EFT) System 353
Reporting Cash 354
Cash Equivalents 355
Restricted Cash 355
A Look at U.S. GAAP 379

Chapter 8

“Where Is That Spare Bulldozer Blade?” 276
Classifying Inventory 278
Determining Inventory Quantities 279
Taking a Physical Inventory 279
Determining Ownership of Goods 280
Inventory Costing 282
Specific Identification 283
Cost Flow Assumptions 283

x

Financial Statement and Tax Effects of
Cost Flow Methods 287
Using Inventory Cost Flow Methods
Consistently 288
Lower-of-Cost-or-Net Realizable Value 289
Inventory Errors 290
Income Statement Effects 290
Statement of Financial Position Effects 291
Statement Presentation and Analysis 292
Presentation 292
Analysis 293
APPENDIX 6A: Inventory Cost Flow Methods
in Perpetual Inventory Systems 294
First-In, First-Out (FIFO) 295
Average-Cost 295
APPENDIX 6B: Estimating Inventories 296
Gross Profit Method 296
Retail Inventory Method 297
APPENDIX 6C: LIFO Inventory Method 298
A Look at U.S. GAAP 325

Accounting for Receivables

382

Are You Going to Pay Me—or Not? 382
Types of Receivables 384
Accounts Receivable 384
Recognizing Accounts Receivable 384
Valuing Accounts Receivable 386
Disposing of Accounts Receivable 393
Notes Receivable 395
Determining the Maturity Date 396
Computing Interest 397


Recognizing Notes Receivable 397
Valuing Notes Receivable 397
Disposing of Notes Receivable 398
Statement Presentation and Analysis 401
Presentation 401
Analysis 401
A Look at U.S. GAAP 423

Chapter 9

Plant Assets, Natural Resources, and
Intangible Assets 426
How Much for a Ride to the Beach? 426
Plant Assets 428
Determining the Cost of Plant Assets 428
Depreciation 431
Revaluation of Plant Assets 439
Expenditures During Useful Life 441
Plant Asset Disposals 441
Extractable Natural Resources 444
Intangible Assets 446
Accounting for Intangible Assets 446
Research and Development Costs 449
Statement Presentation and Analysis 450
Presentation 450
Analysis 450
APPENDIX 9A: Exchange of Plant Assets 451
Loss Treatment 451
Gain Treatment 452
A Look at U.S. GAAP 476

Chapter 10

Liabilities

480

Financing His Dreams 480
Current Liabilities 482
What Is a Current Liability? 482
Notes Payable 482
Sales Taxes Payable 483
Unearned Revenues 484
Current Maturities of Long-Term Debt 484
Statement Presentation and Analysis 485
Non-Current Liabilities 486
Bond Basics 487
Determining the Market Price of a Bond 490
Accounting for Bond Issues 491
Accounting for Bond Redemptions 496
Accounting for Long-Term Notes
Payable 497
Statement Presentation and Analysis 499
APPENDIX 10A: Effective-Interest Method
of Bond Amortization 502
Amortizing Bond Discount 502
Amortizing Bond Premium 504
APPENDIX 10B: Straight-Line Amortization 505
Amortizing Bond Discount 505
Amortizing Bond Premium 507

APPENDIX 10C: Employee-Related Liabilities 508
Payroll Deductions 508
Profit-Sharing and Bonus Plans 509
A Look at U.S. GAAP 532

Chapter 11

Corporations: Organization, Share
Transactions, Dividends, and Retained
Earnings 536
To the Victor Go the Spoils 536
The Corporate Form of Organization 538
Characteristics of a Corporation 538
Forming a Corporation 541
Ownership Rights of Shareholders 541
Share Issue Considerations 541
Corporate Capital 545
Accounting for Share Transactions 547
Accounting for Ordinary Share Issues 547
Accounting for Treasury Shares 550
Accounting for Preference Shares 553
Dividends 555
Cash Dividends 555
Share Dividends 558
Share Splits 560
Retained Earnings 562
Retained Earnings Restrictions 563
Prior Period Adjustments 564
Retained Earnings Statement 564
Statement Presentation and Analysis 566
Presentation 566
Analysis 567
APPENDIX 11A: Statement of Changes
in Equity 568
APPENDIX 11B: Book Value—Another per Share
Amount 569
Book Value per Share 569
Book Value versus Market Price 570
A Look at U.S. GAAP 594

Chapter 12

Investments

598

Playing for Fun and Profit 598
Why Corporations Invest 600
Accounting for Debt Investments 601
Recording Acquisition of Bonds 601
Recording Bond Interest 601
Recording Sale of Bonds 602
Accounting for Share Investments 603
Holdings of Less than 20% 604
Holdings Between 20% and 50% 605
Holdings of More than 50% 606
Valuing and Reporting Investments 608
Categories of Securities 608
Statement of Financial Position
Presentation 614

xi


Presentation of Realized and Unrealized Gain or
Loss 615
Classified Statement of Financial Position 616
APPENDIX 12A: Preparing Consolidated Financial
Statements 618
Consolidated Statement of Financial Position 618
Consolidated Income Statement 621
A Look at U.S. GAAP 641

Chapter 13

Statement of Cash Flows

644

What Should We Do with This Cash? 644
Statement of Cash Flows: Usefulness
and Format 646
Usefulness of the Statement of Cash Flows 646
Classification of Cash Flows 646
Significant Non-Cash Activities 648
Format of the Statement of Cash Flows 648
Preparing the Statement of Cash Flows 650
Indirect and Direct Methods 651
Preparing the Statement of Cash Flows—
Indirect Method 651
Step 1: Operating Activities 652
Summary of Conversion to Net Cash Provided
by Operating Activities—Indirect Method 656
Step 2: Investing and Financing Activities 658
Step 3: Net Change in Cash 659
Using Cash Flows to Evaluate a Company 662
Free Cash Flow 662
APPENDIX 13A: Statement of Cash Flows—
Direct Method 664
Step 1: Operating Activities 665
Step 2: Investing and Financing Activities 669
Step 3: Net Change in Cash 671
APPENDIX 13B: Using a Worksheet to Prepare the
Statement of Cash Flows—Indirect Method 671
Preparing the Worksheet 672
APPENDIX 13C: Statement of Cash Flows—
T-Account Approach 677
A Look at U.S. GAAP 707

Chapter 14

Financial Statement Analysis

710

Making Money the Old-Fashioned Way 710
Basics of Financial Statement Analysis 712
Need for Comparative Analysis 712
Tools of Analysis 712
Horizontal Analysis 713
Statement of Financial Position 714
Income Statement 714
Retained Earnings Statement 715
Vertical Analysis 716
Statement of Financial Position 716
Income Statement 716

xii

Ratio Analysis 718
Liquidity Ratios 719
Profitability Ratios 723
Solvency Ratios 727
Summary of Ratios 728
Earning Power and Unusual Items 730
Discontinued Operations 731
Changes in Accounting Principle 732
Comprehensive Income 732
Quality of Earnings 734
Alternative Accounting Methods 734
Pro Forma Income 735
Improper Recognition 735
A Look at U.S. GAAP 759

Appendix A: Specimen Financial
Statements: TSMC, Ltd. A-1
Appendix B: Specimen Financial
Statements: Nestlé SA B-1
Appendix C: Specimen Financial
Statements: Petra Foods Limited

C-1

Appendix D: Specimen Financial
Statements: Apple Inc. D-1
Appendix E: Time Value of Money

E-1

Nature of Interest E-1
Simple Interest E-1
Compound Interest E-2
Future Value Concepts E-3
Future Value of a Single Amount E-3
Future Value of an Annuity E-4
Present Value Concepts E-7
Present Value Variables E-7
Present Value of a Single Amount E-7
Present Value of an Annuity E-9
Time Periods and Discounting E-11
Computing the Present Value of a
Long-Term Note or Bond E-11
Computing the Present Values in a Capital
Budgeting Decision E-14
Using Financial Calculators E-16
Present Value of a Single Sum E-16
Present Value of an Annuity E-17
Useful Applications of the Financial
Calculator E-18

Appendix F: Accounting for

Partnerships

F-1

Partnership Form of Organization F-1
Characteristics of Partnerships F-1


Organizations with Partnership Characteristics F-3
Advantages and Disadvantages of
Partnerships F-3
The Partnership Agreement F-4
Basic Partnership Accounting F-4
Forming a Partnership F-4
Dividing Net Income or Net Loss F-6
Partnership Financial Statements F-9
Admission and Withdrawal of Partners F-9
Liquidation of a Partnership F-10
No Capital Deficiency F-10
Capital Deficiency F-12

Appendix H: Other Significant
Liabilities H-1 (available at www.wiley.com/
college/weygandt)

Appendix G: Subsidiary Ledgers and Special
Journals G-1 (available at www.wiley.com/
college/weygandt)

Appendix I: Payroll Accounting I-1
(available at www.wiley.com/college/
weygandt)

Expanding the Ledger—Subsidiary
Ledgers G-1
Subsidiary Ledger Example G-2
Advantages of Subsidiary Ledgers G-3
Expanding the Journal—Special Journals G-3
Sales Journal G-4
Cash Receipts Journal G-7
Purchases Journal G-11
Cash Payments Journal G-13
Effects of Special Journals on the General
Journal G-15
Cyber Security: A Final Comment G-17

Provisions and Contingent Liabilities H-1
Recording a Provision H-1
Disclosure of Contingent Liabilities H-2
Lease Liabilities H-3
Operating Leases H-3
Finance Leases H-4
Additional Liabilities for Employee Fringe
Benefits H-5
Paid Absences H-5
Postretirement Benefits H-6

Accounting for Payroll I-1
Determining the Payroll I-1
Recording the Payroll I-5
Employer Payroll Taxes I-8
FICA Taxes I-8
Federal Unemployment Taxes I-8
State Unemployment Taxes I-8
Recording Employer Payroll Taxes I-9
Filing and Remitting Payroll Taxes I-9
Internal Control for Payroll I-10

xiii


Acknowledgments
Financial Accounting, IFRS Third Edition, has benefited greatly from the input of focus group
participants, manuscript reviewers, those who have sent comments by letter or e-mail, ancillary
authors, and proofers. We greatly appreciate the constructive suggestions and innovative ideas
of reviewers and the creativity and accuracy of the ancillary authors and checkers.

Third Edition
Bruce Busta
IE University, Madrid
Jiin-Feng Chen
Shih Chien University
Ya-Hsueh Chuang
Providence University
Shun-Yuan Ho
Providence University
Yong-Ming Hsien
Soochow University
Clare Yu-Shun Hung
Fu Jen Catholic University
Khaled Jaarat
Middle East University
Shu-Hua Lee
National Taipei University
Yousef Shahwan
UAE University

Lan-Fen Wang
National Taipei University
Yi-Fang Yang
Chang Jung Christian University

Ancillary Authors,
Contributors, Proofers,
and Accuracy Checkers
LuAnn Bean
Florida Institute of Technology
Jack Borke
University of Wisconsin—Platteville
Larry Falcetto
Emporia State University
Heidi Hansel
Kirkwood Community College
Coby Harmon
University of California—Santa Barbara

We appreciate the exemplary support and commitment
given to us by executive editor Michael McDonald, senior
marketing manager Karolina Zarychta Honsa, senior development editor Ed Brislin, associate development editor
Courtney Luzzi, editorial assistant Elizabeth Kearns, development editors Terry Ann Tatro and Margaret Thompson,
senior product designer Allie Morris, product designer Matt
Origoni, designers Maureen Eide and Kristine Carney, photo
editor Mary Ann Price, indexer Steve Ingle, and Dennis Free
at Aptara. All of these professionals provided innumerable
services that helped the textbook take shape.

xiv

Kirk Lynch
Sandhills Community College
Barbara Muller
Arizona State University
Glenn Rechtschaffen
University of Auckland
Lakshmy Sivaratnam
Kansas City Kansas Community College
Lynn Stallworth
Appalachian State University
Michael Trebesh
Lansing Community College
Sheila Viel
University of Wisconsin—Milwaukee
Dick Wasson
Southwestern College

Finally, our thanks to Susan Elbe, George Hoffman, Tim
Stookesberry, Douglas Reiner, Brent Gordon, Joe Heider,
and Steve Smith for their support and leadership in Wiley's
Global Education. We will appreciate suggestions and comments from users—instructors and students alike. You can
send your thoughts and ideas about the textbook to us via
email at: AccountingAuthors@yahoo.com.
Jerry J. Weygandt
Paul D. Kimmel
Donald E. Kieso
Madison, Wisconsin Milwaukee, Wisconsin DeKalb, Illinois



CHAPTER

1

Accounting in Action

FEATURE STORY

Knowing the Numbers

Many students who take this course do not plan to be
accountants. If you are in that group, you might be
thinking, “If I’m not going to be an accountant, why
do I need to know accounting?” In response, consider
the quote from Harold Geneen, the former chairman
of a major international company: “To be good at your
business, you have to know the numbers—cold.”
Success in any business comes back to the numbers.
You will rely on them to make decisions, and managers will use them to evaluate your performance. That is
true whether your job involves marketing, production,
management, or information systems.
In business, accounting is the means for communicating
the numbers. If you don’t know how to read financial
statements, you cannot really know your business.
Many companies spend significant resources teaching their
employees basic accounting so that they can read financial
statements and understand how their actions affect the
company’s financial results. Employers need managers in
all areas of the company to be “financially literate.”
Taking this course will go a long way to making you
financially literate. In this book, you will learn how to
read and prepare financial statements, and how to use
basic tools to evaluate financial results.

✔ The Navigator

The Feature Story helps you picture how
the chapter topic relates to the real world
of accounting and business. You will find
references to the story throughout the
chapter.

Appendices A, B, and C of this textbook provide real
financial statements of three companies from different
countries that report using International Financial
Reporting Standards (IFRS): Taiwan Semiconductor
Manufacturing Company (TSMC) Ltd. (TWN), Nestlé SA
(CHE), and Petra Foods Ltd. (SGP). Throughout this textbook, we increase your familiarity with financial reporting by providing numerous references, questions, and
exercises that encourage you to explore these financial
statements. In addition, we encourage you to visit each
company’s website where you can view its complete
annual report. In examining the financial reports of
these three companies, you will see that the accounting
practices of companies in specific countries that follow
IFRS sometimes differ with regard to particular details.
However, more importantly, you will find that the basic
accounting principles are the same. As a result, by
learning these basic principles as presented in this textbook, you will be well equipped to begin understanding
the financial results of companies around the world. ■

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1 Explain what accounting is.
2 Identify the users and uses of accounting.
3 Understand why ethics is a fundamental
business concept.

Scan Learning Objectives

4 Explain accounting standards and the

Read Feature Story
Review and Practice pp. 28–34
• Reviews of Learning Objectives
and Glossary
• Answer Practice Multiple-Choice
Questions, Exercises, and Problem
Complete Assignments

measurement principles.
5 Explain the monetary unit assumption and the
economic entity assumption.
6 State the accounting equation, and define its
components.
7 Analyze the effects of business transactions on
the accounting equation.

Watch WileyPLUS Chapter Reviews

8 Understand the five financial statements and

Read A Look at U.S. GAAP

how they are prepared.


Th
The
h N
Navigator
i
iis a llearning
i system d
designed
i d to prompt you to
use the learning aids in the chapter and set priorities as you study.

The Navigator

Learning Objectives give you a framework for learning
the specific concepts covered in the chapter.


Tetra Images/SUPERSTOCK

PREVIEW OF CHAPTER 1 The Preview describes and outlines the major topics and
subtopics you will see in the chapter.

The Feature Story highlights the importance of having good financial information and knowing how to use it
to make effective business decisions. Whatever your pursuits or occupation, the need for financial information
is inescapable. You cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without
receiving, using, or dispensing financial information. Good decision-making depends on good information.
The purpose of this chapter is to show you that accounting is the system used to provide useful financial
information. The content and organization of Chapter 1 are as follows.

ACCOUNTING IN ACTION
What Is
Accounting?

The Building Blocks
of Accounting

The Basic
Using the
Accounting Equation Accounting Equation Financial Statements

• Three activities
• Who uses
accounting data?

• Ethics in financial
reporting
• Accounting
standards
• Measurement
principles
• Assumptions

• Assets
• Liabilities
• Equity

• Transaction
analysis
• Summary of
transactions

• Income statement
• Retained earnings
statement
• Statement of
financial position
• Statement of cash
flows
• Comprehensive
income statement



The Navigator

3


4

1 Accounting in Action

What Is Accounting?
Learning
Objective 1
Explain what
accounting is.

Essential terms are
printed in blue when they
first appear, and are defined
in the end-of-chapter
Glossary Review.

What consistently ranks as one of the top career opportunities in business? What
frequently rates among the most popular majors on campus? Accounting.1 Why
do people choose accounting? They want to acquire the skills needed to understand what is happening financially inside a company. Accounting is the financial
information system that provides these insights. In short, to understand an organization of any type, you have to know the numbers.
Accounting consists of three basic activities—it identifies, records, and
communicates the economic events of an organization to interested users. Let’s
take a closer look at these three activities.

Three Activities
As a starting point to the accounting process, a company identifies the economic
events relevant to its business. Examples of economic events are the sale of
food and snacks by Unilever (GBR and NLD), the providing of telephone services
by Chunghwa Telecom (TWN), and the manufacture of motor vehicles by Tata
Motors (IND).
Once a company like Unilever identifies economic events, it records those
events in order to provide a history of its financial activities. Recording consists of keeping a systematic, chronological diary of events, measured in
monetary units. In recording, Unilever also classifies and summarizes economic events.
Finally, Unilever communicates the collected information to interested users
by means of accounting reports. The most common of these reports are called
financial statements. To make the reported financial information meaningful,
Unilever reports the recorded data in a standardized way. It accumulates information resulting from similar transactions. For example, Unilever accumulates
all sales transactions over a certain period of time and reports the data as one
amount in the company’s financial statements. Such data are said to be reported
in the aggregate. By presenting the recorded data in the aggregate, the accounting process simplifies a multitude of transactions and makes a series of activities
understandable and meaningful.
A vital element in communicating economic events is the accountant’s ability to analyze and interpret the reported information. Analysis involves use of
ratios, percentages, graphs, and charts to highlight significant financial trends
and relationships. Interpretation involves explaining the uses, meaning, and
limitations of reported data. Appendix A of this textbook shows the financial
statements of Taiwan Semiconductor Manufacturing Company (TSMC) Ltd.
(TWN). Appendix B illustrates the financial statements of Nestlé SA (CHE), and
Appendix C includes the financial statements of Petra Foods Ltd. (SGP). We
refer to these statements at various places throughout the textbook. (In addition,
in the A Look at U.S. GAAP section at the end of each chapter, the U.S. company
Apple Inc. is analyzed.) At this point, these financial statements probably strike
you as complex and confusing. By the end of this course, you’ll be surprised at
your ability to understand, analyze, and interpret them.
Illustration 1-1 summarizes the activities of the accounting process.
You should understand that the accounting process includes the bookkeeping function. Bookkeeping usually involves only the recording of economic
events. It is therefore just one part of the accounting process. In total, accounting

1

The appendix to this chapter describes job opportunities for accounting majors and explains why
accounting is such a popular major.


What Is Accounting?

5

Communication
Identification

Recording

CHIP CITY

Prepare accounting reports

DEL

L

.
..

Select economic events (transactions)

Record, classify, and summarize

....

..
..
..

Analyze and interpret for users

involves the entire process of identifying, recording, and communicating
economic events.2

Illustration 1-1
The activities of the accounting
process

Who Uses Accounting Data?
The specific financial information that a user needs depends upon the kinds of
decisions the user makes. There are two broad groups of users of financial information: internal users and external users.

INTERNAL USERS
Internal users of accounting information are managers who plan, organize, and
run the business. These include marketing managers, production supervisors,
finance directors, and company officers. In running a business, internal users
must answer many important questions, as shown in Illustration 1-2.

Learning
Objective 2
Identify the users and uses
of accounting.

Illustration 1-2
Questions that internal
users ask

Questions Asked by Internal Users

COLA

ON
ON
STRIKE ONSTRIKE
STRIKE
SHARES

Snack chips

Finance
Is cash sufficient to pay
dividends to
SAP shareholders?

Marketing
What price for a Nokia cell phone
will maximize the company's
net income?

Human Resources
Can we afford to give
Toyota employees
pay raises this year?

To answer these and other questions, internal users need detailed information
on a timely basis. Managerial accounting provides internal reports to help users
make decisions about their companies. Examples are financial comparisons of
2

Beverages

Management
Managem
ment
Which PepsiCo product
pro
odu line is
the
any
h most profitable?
fi bl ? Should
Sh
product lines be eliminated?

The origins of accounting are generally attributed to the work of Luca Pacioli, an Italian Renaissance
mathematician. Pacioli was a close friend and tutor to Leonardo da Vinci and a contemporary of Christopher Columbus. In his 1494 text Summa de Arithmetica, Geometria, Proportione et Proportionalite,
Pacioli described a system to ensure that financial information was recorded efficiently and accurately.


6

1 Accounting in Action
operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year.

Illustration 1-3
Questions that external
users ask

EXTERNAL USERS
External users are individuals and organizations outside a company who want
financial information about the company. The two most common types of external users are investors and creditors. Investors (owners) use accounting information to make decisions to buy, hold, or sell ownership shares of a company.
Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money. Illustration 1-3 shows some
questions that investors and creditors may ask.
Questions Asked by External Users

Yeah!

What do we do
if they catch us?
BILL
COLLECTOR

Investors
Is Royal Dutch Shell earning
satisfactory income?

Investors
How does Disney compare in size
and profitability with Time Warner?

Creditors
Will Singapore Airlines be able
to pay its debts as they come due?

Financial accounting answers these questions. It provides economic and financial information for investors, creditors, and other external users. The information
needs of external users vary considerably. Taxing authorities, such as the State
Administration of Taxation in the People’s Republic of China (CHN), want to know
whether the company complies with tax laws. Regulatory agencies, such as the
Autorité des Marchés Financiers (FRA) or the Federal Trade Commission (USA),
want to know whether the company is operating within prescribed rules. Customers
are interested in whether a company like Tesla Motors, Inc. (USA) will continue to
honor product warranties and support its product lines. Labor unions, such as the
German Confederation of Trade Unions (DEU), want to know whether the companies have the ability to pay increased wages and benefits to union members.

>

DO IT!

Basic Concepts
The DO IT! exercises ask
you to put newly acquired
knowledge to work. They
outline the Action Plan
necessary to complete the
exercise, and they show a
Solution.

Indicate whether each of the five statements presented below is true or false. If false, indicate
how to correct the statement.
1. The three steps in the accounting process are identification, recording, and communication.
2. Bookkeeping encompasses all steps in the accounting process.
3. Accountants prepare, but do not interpret, financial reports.
4. The two most common types of external users are investors and company officers.
5. Managerial accounting activities focus on reports for internal users.

Solution
Action Plan
✔ Review the basic
concepts discussed.
✔ Develop an understanding of the key
terms used.

1. True. 2. False. Bookkeeping involves only the recording step. 3. False. Accountants
analyze and interpret information in reports as part of the communication step. 4. False.
The two most common types of external users are investors and creditors. 5. True.
Related exercise material: E1-1, E1-2, and



DO IT!

1-1.

The Navigator


The Building Blocks of Accounting

7

The Building Blocks of Accounting
A doctor follows certain protocols in treating a patient’s illness. An architect
follows certain structural guidelines in designing a building. Similarly, an
accountant follows certain standards in reporting financial information. These
standards are based on specific principles and assumptions. For these standards
to work, however, a fundamental business concept must be at work—ethical
behavior.

Learning
Objective 3
Understand why ethics
is a fundamental
business concept.

Ethics in Financial Reporting
People won’t gamble in a casino if they think it is “rigged.” Similarly, people won’t
play the securities market if they think share prices are rigged. In recent years, the
financial press has been full of articles about financial scandals at Enron (USA),
Parmalat (ITA), Satyam Computer Services (IND), AIG (USA), and others. As the
scandals came to light, mistrust of financial reporting in general grew. One article
in the financial press noted that “repeated disclosures about questionable accounting practices have bruised investors’ faith in the reliability of earnings reports,
which in turn has sent share prices tumbling.” Imagine trying to carry on a business or invest money if you could not depend on the financial statements to be
honestly prepared. Information would have no credibility. There is no doubt that a
sound, well-functioning economy depends on accurate and dependable financial
reporting.
The standards of conduct by which one’s actions are judged as right or wrong,
honest or dishonest, fair or not fair, are ethics. Effective financial reporting
depends on sound ethical behavior. To sensitize you to ethical situations in business and to give you practice at solving ethical dilemmas, we address ethics in a
number of ways in this textbook:
1. A number of the Feature Stories and other parts of the textbook discuss the
central importance of ethical behavior to financial reporting.
2. Ethics Insight boxes and marginal Ethics Notes highlight ethics situations and
issues in actual business settings.
3. Many of the People, Planet, and Profit Insight boxes focus on ethical issues
that companies face in measuring and reporting social and environmental
issues.
4. At the end of each chapter, an Ethics Case simulates a business situation and
asks you to put yourself in the position of a decision-maker in that case.
When analyzing these various ethics cases, as well as experiences in your own
life, it is useful to apply the three steps outlined in Illustration 1-4.
Illustration 1-4
Steps in analyzing ethics cases
and situations

#1

ALT

#2

ALT

1. Recognize an ethical
situation and the ethical
issues involved.
Use your personal ethics to
identify ethical situations and
issues. Some businesses and
professional organizations
provide written codes of
ethics for guidance in some
business situations.

2. Identify and analyze
the principal elements
in the situation.
Identify the stakeholders—
persons or groups who may
be harmed or benefited. Ask
the question: What are the
responsibilities and obligations
of the parties involved?

3. Identify the alternatives,
and weigh the impact of
each alternative on various
stakeholders.
Select the most ethical
alternative, considering all the
consequences. Sometimes there
will be one right answer. Other
situations involve more than
one right solution; these
situations require an evaluation
of each and a selection of the
best alternative.


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