Retained Earnings in Accounting and What They Can Tell You

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    What this means for you is that dividends aren’t what you want to be looking at if you’re trying to understand the specifics of a company’s profitability. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. Below is a short video explanation to help you understand the importance of retained earnings from an accounting perspective. The decision to retain the earnings or to distribute them among shareholders is usually left to the company management. However, it can be challenged by the shareholders through a majority vote because they are the real owners of the company. All of the other options retain the earnings for use within the business, and such investments and funding activities constitute retained earnings.

    • For example, a stockholder who owns 1,000 shares in
      a corporation having 100,000 shares of stock outstanding, owns 1 percent of the
      outstanding shares.
    • Retained earnings can be used for a variety of purposes and are derived from a company’s net income.
    • Retained earnings can be used to pay additional dividends, finance business growth, invest in a new product line, or even pay back a loan.
    • A strong
      company code of ethics and an effective internal control structure can
      help deter fraud from occurring.
    • Retained earnings are typically used for reinvesting in the company, paying dividends, or paying down debt.

    Additional paid-in capital does not directly boost retained earnings but can lead to higher RE in the long term. Additional paid-in capital  reflects the amount of equity capital that is generated by the sale of shares of stock on the primary market that exceeds its par value. Thus, the net effect of a stock dividend is a reduction in retained earnings and an increase in common stock. If you didn’t skim through the above section, you likely noticed the link between dividends and retained earnings. A company profits, distributes some of them to shareholders as dividends, and keeps the rest as retained earnings to be reinvested.

    What Is the Effect of a Stock Dividend Declared and Issued Vs. a Cash Dividend Declared and Paid?

    Therefore, most dividend-paying stocks don’t have to suspend their dividends when they hit a temporary setback that causes them to lose money, because they’ve already built up a reserve of retained earnings to draw from. Companies usually distribute dividends to their shareholders in cash, but they sometimes give them stock instead. Dividends of any kind, cash or stock, represent a return of profits to the company owners, so they reduce the retained earnings account in the stockholders’ equity section of the balance sheet. Stock dividends have no impact on the cash position of a company and only impact the shareholders’ equity section of the balance sheet. If the number of shares outstanding is increased by less than 20% to 25%, the stock dividend is considered to be small. A large dividend is when the stock dividend impacts the share price significantly and is typically an increase in shares outstanding by more than 20% to 25%.

    Retained earnings are reported under the shareholder equity section of the balance sheet while the statement of retained earnings outlines the changes in RE during the period. This is because they need cash for research and development, expansion, and other business growth activities. More often than not, a portion of the profits are reinvested back into the business to fund operations.

    A cash dividend can be a positive indicator for a corporation even though it reduces retained earnings. Typically, cash dividends are declared when a company had strong earnings results and is in a stable financial position. This may also encourage additional investors looking for stocks that return the most reliable dividends,Forbes explains.

    For cash dividends to occur, the corporation’s board of directors must declare the dividends. When a company is doing well and wants to reward its shareholders for their investment, it issues a dividend. A dividend is a distribution of a portion of a company’s earnings to its shareholders. Dividends are paid out either by cash or additional stock, and they offer a good way for companies to communicate their financial stability and profitability to the corporate sphere in general. When a company agrees to sell shares in an initial public offering (IPO) or a new stock issue, it normally sets the price at the par value.

    • The ex-dividend date is set based on stock exchange rules and generally falls one business day before the date of record, which is the date when the company reviews the list of shareholders on its books.
    • Retained earnings are a type of equity and are therefore reported in the shareholders’ equity section of the balance sheet.
    • For example, a shareholder who owns 50 shares and receives a 50 cent dividend per share receives a total of $25.
    • If you look at a company’s balance sheet after a dividend distribution, you’ll notice that the retained earnings has been reduced by a sum equal to the size of the dividend distribution.
    • Stockholder equity also represents the value of a company that could be distributed to shareholders in the event of bankruptcy.

    Dividends can be paid out either as cash or in the form of additional stock, both of which have a different impact on stockholder equity. Cash dividends reduce stockholder equity, while stock dividends do not reduce stockholder equity. Additional paid-in capital is an accounting term used to describe the amount an investor pays above the stock’s par value.

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    On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. The companies that pay them are usually more stable and established, not “fast growers.” Those still in the rapid growth phase of their life cycles tend to retain all the earnings and reinvest them into their businesses. Revenue is the money generated by a company during a period but before operating expenses and overhead costs are deducted.

    How Dividends Affect Stock Prices With Examples

    Keep in mind that 7% is a generally conservative amount when investing long-term. Warren Buffett has managed to achieve roughly three times as much as that over five decades. And if you can achieve a higher CAGR, your portfolio can grow even faster.

    Corporations: Paid-in Capital, Retained Earnings, Dividends, and Treasury Stock

    Retained earnings can be used to pay additional dividends, finance business growth, invest in a new product line, or even pay back a loan. Most companies with a healthy retained earnings balance will try to strike the right combination of making shareholders happy while also financing business growth. Retained earnings reflect the amount of net income a business has left over after dividends have been paid to shareholders. Anything that affects net income, such as operating expenses, depreciation, and cost of goods sold, will affect the statement of retained earnings.

    Example of a Dividend

    When a dividend is paid in cash, the company pays each shareholder a specific dollar amount according to the number of shares they already own. A company that declares a $1 dividend, therefore, pays $1,000 to a shareholder who owns 1,000 shares. For instance, an investor who owns 100 shares receives a total of 10 additional shares if the issuing company distributes a 10% stock dividend. A stock dividend results in an issuance equal to or less than 25% of outstanding shares.

    Definition of Cash Dividends

    Although retained earnings are not themselves an asset, they can be used to purchase assets such as inventory, equipment, or other investments. Therefore, a company with a large retained earnings balance may be well-positioned to purchase new assets in the future or offer increased dividend payments to its shareholders. Unlike with paid-in and additional paid-in capital, a company can distribute its retained earnings. Therefore, retained earnings represent the distributable profits of a company. Every time the company pays dividends to its shareholders, it must deduct them from its retained earnings. For example, say a company has 100,000 shares outstanding and wants to issue a 10% dividend in the form of stock.

    What is Process costing? Pros and Cons of process costing

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    One type of costing system that is used in certain industries is process costing that varies from other types of costing (such as
    job costing) in some ways. In process costing unit costs are more like averages, the process-costing system requires less bookkeeping than does a job-order costing system. (7) The total cost of production of each process for a particular period is divided by the number of units produced in that process during that period, and the average cost per unit of production for a period is obtained. The next step in a process cost system is to calculate the equivalent units in order to account for items that are unfinished at the end of each period. For this step, the number of incomplete units at the end of the period is multiplied by a percentage that represents their progress in the production process.

    • For example, how would you determine the precise cost required to create one gallon of aviation fuel, when thousands of gallons of the same fuel are gushing out of a refinery every hour?
    • The first in first out (FIFO) method of costing is used to introduce the subject of materials costing.
    • In companies producing similar products, process costing is more practical and more accessible to use than job costing.
    • It is necessary to know the cost at every stage of production and this is fulfilled by process costing method.

    Let’s assume, a manufacturing business completed 4,000 products and has another 1,000 units halfway through production, the total costs would be divided by 4,500 units [i.e. If the total cost calculated across all departments to produce these units was $16,875, it means that the cost per unit will be determined by simply dividing the total cost of $16,875 by the 4,500 number of units. The costing methods commonly used in manufacturing include process costing and job costing.

    Comparing Job And Process Costing

    The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. For example, when an airline provides transportation for passengers the way it would produce any product. She has conducted a large number of process mining projects with companies such as Philips Healthcare, Océ, ASML, Philips Consumer Lifestyle, and many others.

    • Process costing is employed by the industries whose production process is continuous and repetitive, as well as the output of one process is the input of another process.
    • (2) It helps in the computation of costs of processes as well as the finished product.
    • With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support.
    • By understanding what is process costing, companies can compare changes in costs over time by using the same standardized costing method each period.

    As a result, they have completed 8,000 pairs of shoes and pass the next stage. All production costs will be accumulated and allocate equally to all products by assuming that they are consumed the same resource. Accountants will calculate the total overhead cost of each month and separate them to each finished product at the month-end. The units that have been complete during the period have been completed in the above stage of the process costing.

    What Is Process Costing?

    During the month of March, the casting department incurs $50,000 of direct material costs and $120,000 of conversion costs (comprised of direct labor and factory overhead). The department processes 10,000 widgets during March, so this means that the per unit cost of the widgets passing through the casting department during that time period is $5.00 for direct materials and $12.00 for conversion costs. The widgets then move to the trimming department for further work, and these per-unit costs will be carried along with the widgets into that department, where additional costs will be added. Process costing system is an accounting method usually used by manufacturing companies that mass produces very identical products or units of output.

    Calculating Unit Cost Under Process Costing

    For example, in a job order cost system, each job is unique, which allows management to establish individual prices for individual projects. By dividing the total cost of a process by the total number of units produced, the cost per unit can be obtained. Process costing is the only reasonable approach to determining product costs in many industries. It uses most of the same journal entries found in a job costing environment, so there is no need to restructure the chart of accounts to any significant degree. This makes it easy to switch over to a job costing system from a process costing one if the need arises, or to adopt a hybrid approach that uses portions of both systems.

    (8) The cost of production of one process is transferred to subsequent process or processes just as output on one process is transferred as input of other process. Process costing is suitable for some businesses, which produces similar products, such as a footwear manufacturing. Besides that, It is also applicable to manufacturing that has many processes which cannot identify the cost of each production process. This method of costing is utilised by the textile, biscuit, cement, paper, and oil refining sectors, among others.

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    (3) The computation of costs under process costing involves less clerical work and expenses. Indirect expenses or overheads incurred on two or more processes are apportioned on the basis of direct wages or on any other suitable basis. Sometimes, overheads are recorded at predetermined rates based on direct wages, prime cost, etc.

    The physical flow of the units can be calculated by reviewing the documents that record the flow of the completed units in and out of the production system. The actual flow can be calculated depending on the policy of the company which can be the FIFO method and AVCO method as well. Process costing is a method of allocating costs in the manufacturing environment where production is carried in batches and requires different stages to be completed. The use of process costing can help companies provide products at competitive prices. In this way, companies can identify obsolete, inefficient, and redundant processes. Let’s assume Coca cola carries out similar calculations for the labeling and packaging departments and discovers that it spent a total of $100,000 to produce 50,000 bottles in the month of May.

    (2) It helps in the computation of costs of processes as well as the finished product. (4) The production records of each process are kept in such a way as to show the quantity of production and the wastage and scrap and the cost of production of each process for each period. (2) Each Process Account is debited with material cost, labour cost, direct expenses and overheads allocated or apportioned to the process. Overheads incurred on two or more processes are apportioned on the basis of direct wages or on any other suitable basis. Sometimes overheads are recorded at pre-determined rate based on direct wages, prime cost, etc. The method assumes that materials are issued from the oldest supply in stock and that the cost of those units, when placed in stock, is the cost of those same units when issued.

    Debt-Adjusted Cash Flow DACF: What it is, How it Works

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    Debt management is important for companies because if managed properly they should have access to additional funding if needed. For many companies, taking on new debt financing is vital to their long-growth strategy since the proceeds might be used to fund an expansion project, or to repay or refinance older or more expensive debt. With understated 3-year FCF and total debt, Monolithic Power Systems FCF to Debt ratio has the largest difference between Traditional and Adjusted of all companies in the S&P 500. Per Figure 11, Monolithic Power Systems’ FCF to Debt has been largely understated since 2017. To demonstrate the difference my firm’s proprietary Adjusted Fundamental data makes, I am writing a series of reports that compare my firm’s Credit Ratings to legacy firms’ ratings.

    Rowe Price’s Traditional and Adjusted FCF to Debt ratio is driven by the difference between its Traditional 3-Year Average FCF and Adjusted 3-Year Average FCF, which is illustrated in Figure 13. Figure 9 reconciles Monolithic Power Systems’ Traditional 3-Year Average FCF and Adjusted 3-Year Average FCF and details each of the differences listed above. This Appendix will show exactly how the Adjusted values for FCF and debt differ from the Traditional versions for two companies Monolithic Power Systems and T. For example, 48 out of 123 (39%) companies that earn a Very Attractive FCF to Debt rating based on the Traditional ratio earn a different rating based on the Adjusted ratio. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

    What Is Debt-Adjusted Cash Flow (DACF)?

    Free cash flow indicates the amount of cash generated each year that is free and clear of all internal or external obligations. In the late 2000s and early 2010s, many solar companies were dealing with this exact kind of credit problem. Sales and income could be inflated by offering more generous terms to clients. However, because this issue was widely known in the industry, suppliers were less willing to extend terms and wanted to be paid by solar companies faster. Alternatively, perhaps a company’s suppliers are not willing to extend credit as generously and now require faster payment.

    • FCFE is good because it is easy to calculate and includes a true picture of cash flow after accounting for capital investments to sustain the business.
    • Rowe Price’s Traditional FCF to Debt ratio has been overstated since 2016.
    • To retrieve a company’s beta, we can look up the company on financial resource sites such as Bloomberg Terminal or CapIQ.
    • But this thesis doesn’t seem feasible when taking its relatively low FCF yield into account.
    • The capital structures of oil and gas firms can be dramatically different.

    Another way of thinking about the cash flow to debt ratio is that it shows how much of a business’ debt could be paid off in one year if all cash flows were devoted to debt repayment. However, practically speaking, it’s unrealistic to envision a business dedicating 100% of its operational cash to debt repayment. Imagine a company has earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1,000,000 in a given year.

    Key Differences

    Only our “novel database” enables investors to overcome those flaws and apply reliable fundamental data in their research. [10] Fixed assets include Net Property, Plant, and Equipment, Goodwill, net, Net Other Intangibles, Unconsolidated Subsidiary Assets, and Other Fixed Assets. [1] I calculate the S&P 500 Traditional and Adjusted 3-Year Average FCF by aggregating the results for all current members of the S&P 500. T. Rowe Price’s Traditional FCF to Debt ratio rose from 10.5 in 2020 to 11.1 TTM, while its Adjusted FCF to Debt ratio fell from 9.9 to 9.6 over the same time. Rowe Price’s Traditional FCF to Debt ratio has been overstated since 2016. Rowe Price’s Traditional 3-Year Average FCF and Adjusted 3-Year Average FCF and details each of the differences listed above.

    Net Debt and Total Debt

    If a company employs debt, its cash flow may be boosted while its share price is unaffected, resulting in a lower P/CF ratio and making the company look relatively cheap. FCF gets its name from the fact that it’s the amount of cash flow “free” (available) for discretionary spending by management/shareholders. For example, even though a company has operating cash flow of $50 million, it still has to invest $10million every year in maintaining its capital assets. For this reason, unless managers/investors want the business to shrink, there is only $40 million of FCF available. Looking at FCF is also helpful for potential shareholders or lenders who want to evaluate how likely it is that the company will be able to pay its expected dividends or interest.

    This first report compares the “Adjusted” Free Cash Flow (FCF) to Debt ratio to the “Traditional” ratio based on unscrubbed financial data. However, this is not recommended, since EBITDA takes into account new inventory purchases that may take a long time to be sold and generate cash flow. However, the free cash flow amount is one of the most accurate ways to gauge a company’s financial condition. Comparing the four companies listed below indicates that Cisco was positioned to perform well with the highest free cash flow yield, based on enterprise value. Lastly, Fluor had relatively a low P/E ratio that could be indicative of a value buy. But this thesis doesn’t seem feasible when taking its relatively low FCF yield into account.

    Debt-Adjusted Cash Flow – DACF

    Companies will typically break down whether the debt is short-term or long-term. Controversy surrounding these providers’ conflicts of interest during the Financial Crisis is well documented, yet conflicts of interest persist because these firms get paid so much by the companies they rate. For example, if a company’s ratio is 20%, then it could, theoretically, pay off all its outstanding debt in five years. EBITDA is good because it’s easy to calculate and heavily quoted so most people in finance know what you mean when you say EBITDA.

    A high cash flow to debt ratio indicates that the business is in a strong financial position and is able to accelerate its debt repayments if necessary. Conversely, a low ratio means the business may be at a greater risk of not making its interest payments, and is on a comparably weaker financial footing. The cash flow to debt ratio is expressed as a percentage, but can also be expressed in years by dividing 1 by the ratio.

    [2] In this analysis, I use the 494 companies for which I have data back to 2016 and are currently in the S&P 500. Figure 10 compares Monolithic Power Systems’ Traditional Debt and Adjusted Debt since 2016. The primary driver of Monolithic Power Systems’ understated FCF to Debt ratio is understated 3-year average FCF. Figure 8 shows the firm’s Traditional and Adjusted 3-Year Average FCF have diverged since 2016.

    Oregon Income Tax Calculator

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    oregon income tax

    Hunter Biden subsequently pleaded not guilty to the two misdemeanor offenses related to his filing of federal income taxes. That previous indictment alleges that Hunter Biden did not pay federal income taxes for either 2017 or 2018, despite owing more than $100,000 in taxes each year. Exactly how much your employer deducts from your wages for federal income taxes depends on factors like your marital status, salary and whether you have any dependents.

    • Homeowners 62 and older may qualify for Oregon’s property tax deferral program.
    • “It’ll help a lot of people and hopefully, help us attract and or retain some of these veterans that have chosen to live in other states because of our pension taxation,” Thatcher said.
    • Oregon’s tax system differs from many other states as it doesn’t have a general sales tax.
    • However, tax credits may be available for taxes paid to another state.
    • This means that when you make purchases in Oregon, you won’t be charged a state-level sales tax on most goods and services.
    • In January 2010, Oregon voters approved Ballot Measure 66, which made two permanent changes to personal income tax calculations.

    Oregon Capital Chronicle focuses on deep and useful reporting on Oregon state government, politics and policy. We help readers understand how those in government are using their power, what’s happening to taxpayer dollars, and how citizens can stake a bigger role in big decisions. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions. In 1862, not long after joining the Union, Oregon enacted a tax on people of color. If you were Black, mixed-race, Hawaiian, or Chinese, you had to pay a tax not levied on white Oregonians.

    US Salary Comparison Calculator

    Whenever Congress creates new tax breaks, Oregon often ends up copying them automatically, without Oregon lawmakers having ever voted to approve them. The only way to stop these new tax breaks oregon income tax is for the Oregon legislature to vote to reject them — to “disconnect” from them. Tax Day will arrive a month later than usual this year, another consequence of the COVID-19 pandemic.

    • The only way to stop these new tax breaks is for the Oregon legislature to vote to reject them — to “disconnect” from them.
    • Your employer then matches those amounts, so the total contribution is double what you paid.
    • Oregon
      doesn’t tax Social Security or Railroad Retirement Board benefits.
    • If you earn wages in excess of $200,000, they are subject to a 0.9% Medicare surtax (though employers do not match this surtax).

    Whether or not you have to pay Oregon state income tax depends on your residency status and the source of your income. Oregon residents are taxed on taxable income from all sources, while nonresidents are taxed on their income from Oregon sources. Oregon has a state income tax system, so knowing their tax regulations and requirements is vital, especially if you are a resident or doing business here. The state follows specific guidelines for individual and business tax returns. Therefore, understanding Oregon’s state income tax system is essential to ensure compliance with tax obligations and to avoid any issues.

    Oregon Income Tax Calculator

    It’s also worth noting that the IRS made major revisions to the W-4 in recent years. The new form doesn’t let filers claim allowances anymore, nor are personal or dependency exemptions allowed. This new W-4 now includes a five-step process that allows you to indicate any additional income or jobs, as well as other pertinent personal information. The corporate excise and income tax is the second largest source of state tax revenue for the General Fund. Corporations that do, or are authorized to do, business in Oregon pay an excise tax. Corporations not doing, or that are not authorized to do, business in Oregon, but have income from an Oregon source, pay income tax.

    It consists of four income tax brackets, with rates increasing from 4.75% to a top rate of 9.9%. That top marginal rate is one of the highest rates in the country. Only a small subset of taxpayers actually pays that rate, however, as it applies only to single taxpayers making at least $125,000 a year ($250,000 for joint filers). The table below shows the full tax brackets and rates for the state income tax in Oregon. ​In most cases, you must make estimated tax payments if you expect to owe $1,000 or more when you file your Oregon income tax return.

    Normal Balance of Accounts

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    if all of the accounts have normal balances, what are the total debits on the trial balance?

    Bookkeepers and accountants or small business owners use different types of trial balance, depending on the stage of the accounting cycle close. Accounting software and ERP systems often generate trial balance reports. Some small businesses less efficiently use Google Sheets or Excel worksheets or templates for preparing their trial balance documents. It’s important normal balance of accounts to run a trial balance report and check it during the testing process of migrating from an existing accounting system to a new system that will replace it or add new functionality. The business needs to ensure that all accounts are mapped and included and will be posted to the general ledger. Otherwise, the general ledger and financial statements will be inaccurate.

    • For this reason the account balance for items on the left hand side of the equation is normally a debit and the account balance for items on the right side of the equation is normally a credit.
    • The typical type of balance for an asset on the balance sheet is a debit balance, whereas the typical balance for a liability account is a credit balance.
    • Let’s now take a look at the T-accounts and unadjusted trial balance for Printing Plus to see how the information is transferred from the T-accounts to the unadjusted trial balance.
    • Software for automating accounting for payables and supplier invoice processing and making efficient and cost-efficient global mass payments helps your company achieve competitive advantages.
    • He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

    Since your company did not yet pay its employees, the Cash account is not credited, instead, the credit is recorded in the liability account Wages Payable. The exceptions to this rule are the accounts Sales Returns, Sales Allowances, and Sales Discounts—these accounts have debit balances because they are reductions to sales. Accounts with balances that are the opposite of the normal balance are called contra accounts; hence contra revenue accounts will have debit balances. When you have finished, check that credits equal debits in order to ensure the books are balanced.

    Revenues and Gains Are Usually Credited

    Balance sheet accounts include Cash accounts, Marketable Securities, Accounts Receivable, Inventory, Fixed Assets, Prepaid Expenses, and Intangible Assets. Liabilities include Accounts Payable, Accrued Liabilities, Short-term Portion of Notes Payable, Notes Payable-Long Term, and Deferred Revenues. Shareholders’ Equity Accounts in the balance sheet include Retained Earnings, Paid-In Capital, Treasury Stock, and Accumulated Other Comprehensive Income (Loss). If a trial balance is in balance, does this mean that all of the numbers are correct? It is important to go through each step very carefully and recheck your work often to avoid mistakes early on in the process.

    Once all ledger accounts and their balances are recorded, the debit and credit columns on the trial balance are totaled to see if the figures in each column match each other. The final total in the debit column must be the same dollar amount that is determined in the final credit column. For example, if you determine that the final debit balance is $24,000 then the final credit balance in the trial balance must also be $24,000. If the two balances are not equal, there is a mistake in at least one of the columns. The debit or credit balance that would be expected in a specific account in the general ledger.

    Using the Normal Balance

    To begin, enter all debit accounts on the left side of the balance sheet and all credit accounts on the right. Consider which debit account each transaction impacts and whether it ultimately increases or decreases that account. Finally, calculate the balance for each account and update the balance sheet. After the preliminary Unadjusted Trial Balance, also known as the Trial Balance, is prepared, accountants review it and determine if corrections are required for determining adjusted balances.

    if all of the accounts have normal balances, what are the total debits on the trial balance?

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