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8/10/2019 ch02_sm_FA7e-1[doc.wendoc.com].doc

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b

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b

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b

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b

T0.

J3scss the s3>n33c4nce o the o55ow3n> 4ssmpt3ons 3n the p8ep484t3on o 4n

ent3t=bs 3n4nc345 st4tements: `4a

ehttp://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5nt3t= 4ssmpt3on

`?a 4cc845 ?4s3s 4ssmpt3on ca >o3n> conce8n 4ssmpt3on da pe83od 4ssmpt3on


11/68

http://doc.wendoc.com/`4a Cnt3t= Assmpt3on:

K the t84ns4ct3ons o 4n ent3t= 48e to ?e 8eco8ded c54ss33ed 4nd smm483sed

3nto


3n4nc345 st4tements the 4ccont4nt mst ?e 4?5e to 3dent3= c5e485= the

?ond483es o the ent3t= ?e3n> 4cconted o8. Lnde8 the 4ccont3n> ent3t=

4ssmpt3on the ent3t= 3s cons3de8ed 4 sep484te ent3t= d3st3n>3sh4?5e 8om 3ts

owne8 4nd 8om 455 othe8 ent3t3es. Kt 3s 4ssmed th4t e4ch ent3t= cont8o5s 3ts

4ssets 4nd 3nc8s 3ts 534?353t3es. Dhe 8eco8ds o 4ssets 534?353t3es 4nd

?s3ness 4ct3X3t3es o the ent3t= 48e Hept comp5ete5= sep484te 8om those o the

owne8 o the ent3t= 4s we55 4s 8om those o othe8 ent3t3es.

Dhe 4ccont3n> ent3t= 4ssmpt3on 3s 3mpo8t4nt s3nce 3t 5e4ds to the de83X4t3on

o the 4ccont3n> eU4t3ohttp://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5n.

`?a Dhe Acc845 [4s3s Assmpt3on

Lnde8 the 4cc845 ?4s3s o 4ccont3n> the eects o t84ns4ct3ons 4nd eXents

48e 8eco>n3sed 3n 4ccont3n> 8eco8ds when the= occ8 4nd not when the c4sh 3s

8ece3Xed o8 p43d. ence 3n4nc345 st4tements 8epo8t not on5= on c4sh

t84ns4ct3ons ?t 45so on o?53>4t3ons to p4= c4sh 3n the t8e 4nd on 8eso8ces

th4t 8ep8esent 8ece3X4?5es o c4sh 3n t8e. Kt 3s 48>ed 3n the F84mewo8H th4t

4ccont3n> on 4n 4cc845 ?4s3s p8oX3des s3>n33c4nt5= ?ette8 3no8m4t3on 4?otthe t84ns4ct3ons 4nd othe8 eXents o8 the p8pose o dec3s3on m4H3n> ?= se8s o

3n4nc345 st4tements th4n does the c4sh ?4s3s.

`ca Dhe _o3n> Gonce8n Assmpt3on

Acco8d3n> to the F84mewo8H 3n4nc345 st4tements 48e p8ep48ed on the 4ssmpt3on

th4t the e93st3n> ent3t= 3s e9pected to cont3ne ope84t3n> 3nto the t8e. Kt

3s 4ssmed th4t the 4ssets o the ent3t= w355 not ?e so5d o 4nd th4t theent3t= w355 chttp://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5ont3ne 3ts


12/68


13/68

http://doc.wendoc.com/45te8n4t3Xe co8ses o

4chttp://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5t3on nde8 cons3de84t3on.

A5so 3no8m4t3on 3s 8e5eX4nt 3 3t 3s 4?5e to he5p dec3s3on m4He8s eX454te

p4st dec3s3ons. Dhe 3no8m4t3on m4= con38m th4t 4 p8eX3os


dec3s3on w4s co88ect o8 3t co5d show th4t the 8es5ts o 4 p8eX3os dec3s3on

we8e ndes384?5e 4nd th4t 4 new dec3s3on 3s necess48=. Dhs 8e5eX4nt

3no8m4t3on 3s s43d to p54= 4 p8ed3ct3Xe 8o5e 4nd 4 con38m4to8= o8 eed?4cH

8o5e.

A 8the8 4spect o 8e5eX4nce 3s th4t the 3no8m4t3on mst ?e p8esented ?= the

4ccont4nt to the se8 3nte8n45 o8 e9te8n45a 3n t3me o8 4 dec3s3on to ?e m4de.

Dhe t3me53ness o 3no8m4t3on 3s 4n 3mpo8t4nt 4cto8 3n ens83n> th4t

3no8m4t3on 3s 8e5eX4nt.

Se534?353t=/F43th5 8ep8esent4t3on

Se534?353t= 4s d3scssed 3n the c88ent F84mewo8H me4ns th4t the se8 3s

4ss8ed th4t the 3no8m4t3on p8esented 8ep8esents

43th55=http://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5 w3thot ?34s o8

nde e88o8 the nde85=3n> t84ns4ct3ons 4nd eXents ?e3n> 8epo8ted 3n the

3n4nc345 st4tements. Accont4nts 8eU38e 3no8m4t3on to ?e 8e534?5e wh3ch

me4ns th4t the 3no8m4t3on 8epo8ted 8ep8esents econom3c 8e453t= 4s c5ose5= 4s

poss3?5e.

Note th4t the KA;[ J3scss3on I4pe8 3ssed 3n : Gh4pte8 2: O453t4t3Xe Gh484cte83st3cs 4nd

Gonst843nts o Jec3s3onse5 F3n4nc345 Sepo8t3n> Kno8m4t3on 3ssed 3n o

8e534?353t= w4s not c5e48 to const3tents 3t sho5d ?e 8ep54ced ?= the concept

o 43th5 8ep8esent4t3on.


14/68

http://doc.wendoc.com/Acco8d3n> to the C9pos8e J84t 43th5 8ep8esent4t3on 3s 4tt43ned when the

dep3ct3on o 4n econom3c eXent 3s comp5ete net845 4nd 8ee 8om m4te8345

e88o8. F3n4nc345 3no8m4thttp://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm53on

th4t 43th55= 8ep8esents 4n econom3c phenomenon dep3cts the econom3c s?st4nce

o the nde85=3n> t84ns4ct3on eXent o8 c38cmst4nces wh3ch 3s not 45w4=s the

s4me 4s 3ts 5e>45 o8m.

J3st3n>3sh ?etween the concepts o cons3stenc= 4nd comp484?353t=b ;ho5d the

s4me 4ccont3n> method ?e 45w4=s 4pp53ed cons3stent5= 3n 3n4nc345 st4tementsb

As ment3oned 3n the KA;[ C9pos8e J84t An Kmp8oXed Goncept45 F84mewo8H o8

F3n4nc345 Sepo8t3n>: Gh4pte8 2: O453t4t3Xe Gh484cte83st3cs 4nd Gonst843nts o

Jec3s3onse5 F3n4nc345 Sepo8t3n> Kno8m4t3on 3ssed 3n ch484cte83st3c o 3no8m4t3on 3.e. 3t enh4nces the

se5ness o 3n4nc345 8epo8t3n> 3no8m4t3on 3n m4H3n> econom3c dec3s3ons.

Gomp484?353t= 3s the U453t= o 3no8m4t3on th4t en4?5es se8s to 3dent3=

s3m35483t3es 3n 4nd d3e8ences ?etween two sets o econom3c d4t4. Gons3stenc=

8ee8s to se o the s4me 4ccont3n> po53c3es

http://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm54nd p8oced8es e3the8 8om

pe83od to pe83od w3th3n 4n ent3t= o8 3n 4 s3n>5e pe83od 4c8oss ent3t3es. DheC9pos8e J84t 48>es th4t comp484?353t= 3s the >o45 4nd th4t cons3stenc= o

po53c3es 4nd p8oced8es 3s 4 me4ns to 4n end th4t he5ps to 4ch3eXe the >o45.

oweXe8 3t 3s no8 s4t3s4cto8= o8 po53c3es 4nd p8oced8es to ?e 4pp53ed

cons3stent5= 3 the 3no8m4t3on th4t the= p8odce 3s no 5on>e8 8e5eX4nt o8 4

43th5 8ep8esent4t3on o econom3c 8e453t=.

T2.

TQ. Ehen cons3de83n> the ch484cte83st3c o nde8st4nd4?353t= 3n the p8ep484t3on

o

3n4nc345 st4tements does th3s me4n th4t 3n4nc345 st4tements sho5d ?e s3mp5e

to nde8st4ndb J3scss.

Acco8d3n> to the KA;[ C9pos8e J84t An Kmp8oXed Goncept45 F84mewo8H o8


15/68

http://doc.wendoc.com/F3n4nc345 Sepo8t3n>: Gh4pte8 2: O453t4t3Xe Gh484cte83st3cs 4nd Gonst843nts o

Jec3s3onse5 F3n4nc345 Sepo8t3n> Kno8m4t3on 3ssed 3n

8e4son4?5e Hnow5ed>e o ?s3ness 4nd econom3c 4ct3X3t3es 4nd 3n4nc345

4ccont3n> 4nd who std= the 3no8m4t3on w3th 8e4son4?5e d353>ence to

comp8ehend 3ts me4n3n>. Kt sho5d ?e c5e48 th4t eXen tho>h 3t 3s des384?5e o8

3n4nc345 st4tements to ?e e9p8essed 3n s3mp5e 54n>4>e 8e5eX4nt 3no8m4t3on

sho5d not ?e e9c5ded me8e5= ?ec4se 3t m4= ?e too comp5e9 o8 d33c5t o8

some nt843ned se8s to nde8st4nd. Lnde8st4nd4?353t= does not me4n s3mp53c3t=.

K se8s c4nnot nde8st4nd the 3no8m4t3on cont43ned 3n 3n4nc345 st4tements

the= sho5d seeH the he5p o 4 t843ned 4dX3se8.

Lnde8st4nd4?353t= 3s 8the8 enh4nced when 3no8m4t3on 3s c54ss33ed

ch484cte83sed 4nd p8esented c5e485= 4nd conc3se5=.

TV.

Dhe concept o m4te83453t= 8e54tes to the e9tent to wh3ch 3no8m4t3on c4n ?e

om3tted m3sshttp://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5t4ted o8

>8oped w3th othe8 3no8m4t3on w3thot m3s5e4d3n> the 8epo8t se8s when the= 48e

m4H3n> the38 econom3c dec3s3ons. Dhs the p83ces p43d o8 3ns3>n33c4nt 3tems

48e not shown sep484te5= 3n the 3n4nc345 st4tements ?ec4se the= co5d

c5tte8 the 3n4nc345 st4tements w3th he4ps o 3ns3>n33c4nt o8 3mm4te83453no8m4t3on 3n the oXe8455 conte9t o the dec3s3on ?e3n> m4de ?= the se8.

oweXe8 3t 3s 3mpo8t4nt when 4ssess3n> m4te83453t= to ?e 4w48e o the

p48t3c548 dec3s3on ?e3n> m4de ?= the se8. Dhe s4me 3no8m4t3on m4= ?e m4te8345

o8 one dec3s3on 4nd 3mm4te8345 o8 4nothe8. Dhs cons3de84?5e id>ement 3s

needed 3n o8de8 to 4ssess wh3ch 3no8m4t3on 3s m4te8345 4nd wh3ch 3s 3mm4te8345

o8 the p48t3c548 dec3s3on 4t h4nd.

Acco8d3n> to the KA;[ C9pos8e J84t An Kmp8oXed Goncept45 F84mewo8H o8F3n4nc345 Sepo8t3n>: Gh4pte8 2: O453t4t3Xe Gh484cte83st3cs 4nd Gonst843nts o


16/68

http://doc.wendoc.com/Jec3s3onse5 F3n4nc345 Sepo8t3n>

Kno8mhttp://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm54t3on 3ssed 3n the ent3t= 4ssmpt3on the 4ccont3n>

eU4t3on h4s ?een deXe5oped. Dh3s eU4t3on 8ep8esents 4 st4tement o the ent3t=b

s 3n4nc345 pos3t3on 4t 4 po3nt 3n t3me. Mne o8m4t o the 4ccont3n> eU4t3on

3s: Assets j B34?353t3es CU3t=

Dhe eU4t3on po3nts ot th4t when one o the ent3t=bs e5ements e.>. 4ssets 3s

3nc8e4sed the8e mst ?e 45so 4 ch4n>e 3n

4nohttp://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5the8 e5ement: e3the8

534?353t3es mst 3nc8e4se o8 eU3t= mst 3nc8e4se o8 4nothe8 4sset mst

dec8e4se. Dhe eU4t3on mst 45w4=s ?e 3n ?454nce 4te8 8eco8d3n> eXe8=

t84ns4ct3on. Dh3s phenomenon whe8e?= 4 ch4n>e 3n one e5ement 4sseta c4ses 4

ch4n>e 3n 4nothe8 e3the8 534?353t= o8 eU3t= o8 4nothe8 4sseta 3s 8ee88ed to

4s do?5eent8=. Jo?5e ent8= 4ccont3n> 3s the n4me >3Xen to th3s d458eco8d3n> p8ocess wh3ch 3s deXe5oped 8the8 3n ch4pte8 Q.


SM[


17/68


SeU38ed: A. Lse these 3tems to p8ep48e 4 ?454nce sheet s3m3548 to the one 3n

3>8e 2.2. Note

th4t 4 m4io8 3tem 3s m3ss3n> 3n the 53st.

[. Sec4st the st4tement to p8esent 3t 3n n4884t3Xe o8m 4s 3n 3>8e 2.Q. A.

I8ep483n> 4 ?454nce sheet

Gh4pte8 2: F3n4nc345 st4tements

o8http://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5 dec3s3on m4H3n>

[.


Kncome st4tement 4nd 4n45=s3s

@MN;MN ;CSlKGC;

SeU38ed: A. I8ep48e 4n 3ncome st4tement o8 the =e48 o8 @ohnson ;e8X3ces. [.

Eho m4de mo8e ot o the pe8sonne5 ?s3ness P @ohnson o8 he8 pe8son45

4ss3st4ntb

Eh4t 4ct3on m3>ht @ohnson t4He to 3nc8e4se the p8o3t4?353t= o the ?s3ness 3nthe =e48 ended Q0 @ne 20TTb


18/68


A.

[. Dhe pe8son45 4ss3st4ntbs s4548= o VY 000 3s >8e4te8 th4n @ohnsonbs 8epo8ted

p8o3t

o8 the =e48. Assm3n> the s4548= h4s ?een p43d to the 4ss3st4nt the 4ss3st4nt

h4s 45so t4Hen ot VY 000 c4sh 8om the ope84t3ons o the ?s3ness 4s 4

?s3ness e9pensea. Ee h4Xe no 3no8m4t3on on @ohnsonbs d84w3n>s 8om the

?s3ness so we do not Hnow how mch c4sh @ohnson h4s t4Hen ot o the ?s3ness

o8 pe8son45 se. oweXe8http://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5

3 the owne8 we8e to w3thd84w 455 o the p8o3t she wo5d st355 not h4Xe

8ece3Xed 4s mch 4s he8 pe8son45 4ss3st4nt.

Do 3mp8oXe p8o3t4?353t= @ohnson needs to e3the8 3nc8e4se 3ncome o8 dec8e4se

e9penses. Do 3nc8e4se 3ncome @ohnson wo5d need to t4He on mo8e c53ents 4nd

h38e mo8e tempo848= wo8He8s th3s wo5d 45so 3nc8e4se he8 ?s3ness e9pensesa.

Knc8e4s3n> the ch48>e ot 84te wo5d 45so ?e 4nothe8 opt3on. Dh3s opt3on wo5dneed 4n e94m3n4t3on o the 3nc8e4sed 3ncome comp48ed to the 3nc8e4sed costs.

A5te8n4t3Xe5= @ohnson co5d dec8e4se the ho8s o the pe8son45 4ss3st4nt 4nd

t4He 4 mo8e 4ct3Xe 8o5e ?t she wo5d need to cons3de8 he8 4X4354?353t= o8 the

e9t84 ho8s.


An45=s3s o eU3t=

;ASA MJ_C


19/68

http://doc.wendoc.com/SeU38ed: A. K ;484h d3d not cont83?te to o8 w3thd84w 8om the ?s3ness d83n>

the =e48 20http://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm50\T0

wh4t w4s the p8o3t/5oss o8 the =e48b

[. K ;484h h4d w3thd84wn T2 000 d83n> the =e48 c45c54te the p8o3t/5oss o8

the

=e48.

G. K ;484h h4d cont83?ted TW 000 4nd w3thd84wn Z 000 p8ep48e 4 st4tement o

ch4n>es 3n eU3t= o8 the =e48 ended Q0 @ne 20T0.

G45c54t3on o CU3t= 4s 4t Q0 @ne 200\ 3s TY W00

`3.e. Q7 W00 2T 000a

G45c54t3on o CU3t= 4s 4t Q0 @ne 20T0 3s 2T 000

`3.e. Q\ 000 TZ 000a A. G4p3t45 Gont83?t3ons 4nd J84w3n>s 48e n35 o8 the

=e48. Cnd3n> CU3t= 2T 000 P [e>3nn3n> CU3t= TY W00

j I8o3t o V W00.

[. G4p3t45 Gont83?t3ons n35 4nd d84w3n>s T2 000 o8 the =e48.

Cnd3n> CU3t= 2T 000 [e>3nn3n> CU3t= TY W00 P J84w3n>s T2 000

j Net I8o3t TY W00.

G.


20/68


Boss 3s the ?454nc3n> 3tem.


KSlKNCk; ML;C EA;KN_ ;CSlKGC;

SeU38ed:

Jete8m3ne p8o3t/5oss e48ned ?= the ?s3ness 3n e4ch o the 2 =e48s ended Q0

@ne 200\ 4nd Jete8m3n3n> p8o3t 8om eU3t= ?454nces

Q0 @ne 20T0.


Mpe84t3n> 3nXest3n> 4nd 3n4nc3n> 4ct3X3t3es

SeU38ed:

G54ss3= e4ch o the o55ow3n> 4ct3X3t3es 4s ?e3n> e3the8 ope84t3n> 3nXest3n>

o8 3n4nc3n> o8 the p8pose o p8ep483n> 4 st4tement o c4sh 5ows. Knd3c4te

whethe8 the8e 3s 4n 3n5ow Ka o8 ot5ow Ma o c4sh:


21/68

http://doc.wendoc.com/`4a s45e o 54nd 4nd ?35d3n>s o8 c4sh ?a p4=ment o w4>es to emp5o=ees ca

w3thd84w45 o c4sh ?= the owne8 da 8ep4=ment o 4 ?4nH 5o4n

`ea c4sh p8ch4se o 4 t8cH ?= 4 m4n4ct83n> comp4n=

`a c4sh p8ch4se o 4 5eet o moto8 Xeh3c5es

?http://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5= 4 c48 de45e8sh3p `>a

?o88ow3n> o mone= 8om 4 3n4nce comp4n= on 4 5on>te8m ?4s3s ha c4sh

co55ected 8om the cstome8s o the ?s3ness `4a KnXest3n> K ?a Mpe84t3n>

M ca F3n4nc3n> M da F3n4nc3n> M ea KnXest3n> M a Mpe84t3n> M

`>a F3n4nc3n> K ha Mpe84t3n> K


KI ANJ MI

SeU38ed:

Knd3c4te whethe8 these 3tems wo5d 4ppe48 3n 3p 4nd opbs ?454nce sheet 3ncome

st4tement st4tement o ch4n>es 3n eU3t= 4nd/o8 st4tement o c4sh 5ows. Fo8

those 3tems 3nc5ded 3n the c4sh 5ow st4tement 3nd3c4te whethe8 the 3tem

8e54tes to ope84t3n> 4ct3X3t3es 3nXest3n> 4ct3X3t3es o8 3n4nc3n> 4ct3X3t3es.

3nt: ;ome 3tems m4= 4ppe48 3n mo8e th4n one 3n4nc345 st4tement. `4a

[454nce sheet st4tement o ch4n>es 3n eU3t= 4nd st4tement o c4sh 5ows

`F3n4nc3n> P t8e4ted 4s 4

cohttp://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5nt83?t3on o c4p3t45a

`?a [454nce sheet on5= ca Kncome st4tement 4nd st4tement o c4sh 5ows

`Mpe84t3n>a da Kncome st4tement 4nd st4tement o c4sh 5ows Mpe84t3n>a ea Not

8epo8ted 3n the 3n4nc345 st4tements 4s not p48t o the 4ccont3n> ent3t= 3p

4nd


22/68


23/68

http://doc.wendoc.com/o the ?s3ness.

_. Q. Dhe cost o st4t3one8= 3s not shown sep484te5= 3n the 3ncome st4tement.

[. V. ;e8X3ces p8oX3ded ?= 4 ?s3ness ent3t= 48e 8eco8ded ?eo8e the 8ece3pt o

c4sh.

C. W. te8m 5e4se 4884n>ement 3s

8eco8ded ?=

the ?s3ness 4s 3ts own 4sset.

J. Y. An e9pense 3s 8eco8ded 3n the =e48 3n wh3ch 4n 4sset o8

?ene3http://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5t 3s consmed 3n the

p8ocess o c488=3n> on the ent3t=bs ?s3ness.

G. 7. Assets 48e not 8eco8ded 4t 53U3d4t3on p83ces.

. Z. Gons3stent 4ccont3n> po53c3es 4nd methods 48e sed 3n the p8ep484t3on o3n4nc345

st4tements 8om one =e48 to 4nothe8.


[s3ness t84ns4ct3ons

Fo8 e4ch o the o55ow3n> desc83?e 4 t84ns4ct3on th4t wo5d h4Xe the st4ted

eect on the 4ccont3n> eU4t3on:

T. Knc8e4se 4n 4sset 4nd 3nc8e4se 4 534?353t= 2. Knc8e4se one 4sset 4nd dec8e4se4nothe8 4sset Q. Jec8e4se 4n 4sset 4nd dec8e4se eU3t= V. Knc8e4se 4n 4sset 4nd


24/68

http://doc.wendoc.com/3nc8e4se eU3t= W. Jec8e4se 4 534?353t= 4nd dec8e4se 4n 4sset.

T. I8ch4se 4n 4sset on c8ed3t 2. I8ch4se 4n 4sset o8 c4sh

Q. Mwne8 w3thd84ws c4sh 8om the ?s3ness o8 pe8son45 se. V. Mwne8

cont83?tes c4shttp://doc.wendoc.com/?Vde0eVT\VdWccWd4Zde2Z.htm5h to the

?s3ness. W. Dhe ?s3ness p4=s c4sh to 3ts c8ed3to8s.

;tdents m4= h4Xe m4n= othe8 poss3?5e e94mp5es 3n e4ch o TW.


I8ep484t3on o 4 ?454nce sheet

JAlC fSA th4t the th8ee months dete8m3ne the p8o3t o8

NoXem?e8 4nd Jecem?e8.

G. I8ep48e 4 ?454nce sheet o8 the ?s3ness 4t the end o Jecem?e8 20T0. Dhe

he4d3n>

sho5d 8e4d: J4Xe f84me8 ;o53c3to8a

A.


25/68


[4sed on the 4ccont3n> eU4t3on: Assets 5ess B34?353t3es j CU3t=

QT Mcto?e8 G4p3t45 [454nce j `\ T00 TY T00 700 2\ Z00 VT 000 Q 000a

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31/68

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32/68



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33/68

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34/68


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35/68

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36/68


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37/68


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39/68


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Acconts M3ce Sece3X4?5e ;pp53es

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43/68


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54/68


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58/68

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ch02_sm_fa7e-1[doc.wendoc.com].doc

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