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what is financial statement analysis

Financial statement analysis is the process of analyzing a company's financial statements for decision-making purposes. Requisites 4. Financial analysis only reviews a company's financial information, not its operational information, so you cannot see a variety of key indicators of future performance, such as the size of the order backlog, or changes in warranty claims. Reveals the sales level at which a company breaks even. There are a number of users of financial statement analysis. The results can be used to make investment and lending decisions. An array of ratios are available for discerning the relationship between the size of various accounts in the financial statements. The first three designations require the completion of 10 to 15-week classes in: Credit Principles, Financial Statement Analysis, and Accounting. Most common types are: Current Ratiomeasures the extent of the number of current assets to current liabilities. Parties Interested. Financial statement analysis is the process that aims to evaluate the current and past financial positions and results of operations of an enterprise. 3. Return on net assets. ). Basic financial statement analysis—as presented in this reading—provides a foundation that enables the analyst to better understand other information gathered from research beyond the financial reports. Click the following links for a thorough review of each ratio. 2. The term ‘analysis’ means the simplification of financial data by methodical classification of the data given in the financial statements… According to Accounting Tools, financial statement analysis involves reviewing the financial statements of an organization to gain an understanding of its financial situation. Horizontal analysis is also known as trend analysis. Shows the profits left after variable costs are subtracted from sales. Home » Accounting Dictionary » What is Financial Statement Analysis? Definition: Financial statement analysis is using analytical or fiscal instruments to analyze and compare financial statements in sequence to generate business decisions. This can lead an analyst to draw incorrect conclusions about the results of a company in comparison to its competitors. Vertical analysis compares the company performance to a base number. Objectives of Financial Statement Analysis. Objectives of Analysis of Financial Statement 3. Answer: Trend analysis evaluates an organization’s financial … What is the purpose of financial statement analysis? Horizontal analysis is the comparison of financial information over a series of reporting periods, while vertical analysis is the proportional analysis of a financial statement, where each line item on a financial statement is listed as a percentage of another item. These ratios are a strong indicator of the quality of management, since they reveal how well management is utilizing company resources. Typical trend lines are for revenue, the gross margin, net profits, cash, accounts receivable, and debt. Contribution margin ratio. These issues are: Comparability between periods. Financial statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements and a study of the trends of these factors as shown in a series of statements. It is basically the process of examining and analyzing an organization’s fiscal reports. Guide to Financial Statement Analysis. The general groups of ratios are: Liquidity ratios. These statements include the income statement, balance sheet, statement of cash flows, notes to accounts and a statement of changes in equity (if applicable). Leverage ratios. Putting another way, financial statement analysis is a study about accounting ratios among various items included in the balance sheet. Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm - by properly establishing relation s hip This ratio inversely shows investors how much the assets are worth that they own after all the liabilities are paid off. To put it differently, financial statement analysis is a method for investors and lenders to analyze financial statements and see whether the company is healthy enough to invest in or loan. - [Kay] Financial statement analysis is the process of using the relationships among a company's financial statement numbers to gain insights into that company's operations. The first method is the use of horizontal and vertical analysis. Measures a company's ability to generate sales from a certain base of working capital. Each one of these tools gives decision makers a little more insight into how well the company is performing. Measures a company's ability to generate sales from a certain base of fixed assets. Objectives of Financial Statement Analysis. This review involves identifying the following items for a company's financial statements over a series of reporting periods: Trends. 5. Shows company profits as a percentage of fixed assets and working capital. For example, an expense may appear in the cost of goods sold in one period, and in administrative expenses in another period. The purpose of financial statements is to provide pertinent information on the financial position (Balance Sheet), profitability (Income Statement) and operating, investing, and financing activities (Cash Flow Statement) of a company. The analysis of key financial metrics allows the … Financial statements analysis with usage of computer application 1. Calculates the amount by which sales must drop before a company reaches its break even point. Financial Statement Analysis refers to the process of analyzing and assessing a company’s financial statements to gain an understanding of its business model, financial performance, risk and profitability of the business.. For example, one can calculate a company's quick ratio to estimate its ability to pay its immediate liabilities, or its debt to equity ratio to see if it has taken on too much debt. Question: How is trend analysis used to evaluate the financial health of an organization? These ratios measure how well a company performs in generating a profit. Instead ratios are used. Financial statement analysis is a significant business practice because it helps top management review a corporation's balance sheet and income statement to gauge levels of economic standing and profitability.Let us say Mr. A., the chief financial officer (CFO) of a large distribution company, reviews the company's balance sheet and compares short-term assets, such as cash and … Different people do financial anal y sis for different purposes, but the common purpose is to obtain information that is useful for their economic decisions from financial statements. By funds, in this context, we mean investments and debt. Sales to working capital ratio. Calculates the amount of profit after taxes and all expenses have been deducted from net sales. 2. Ratio analysis compares different financial statement accounts. For instance, the debt to equity ratio compares the company’s debt to the total equity. Thus, financial analysis only presents part of the total picture. - [Kay] Financial statement analysis is the process of using the relationships among a company's financial statement numbers to gain insights into that company's operations. A financial analysis is an assessment of how viable, stable, solvent, and profitable a business or project is. 2. “Financial Statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements, and a study of the trend of these factors as shown in a series of statements”. For example, a small and large company can’t be compared on a pure dollar value. The three types of analysis are horizontal analysis, vertical analysis, and ratio analysis. The process of reviewing and analyzing a company’s financial statements to make better economic decisions is called analysis of financial statements. Financial Statement Analysis is a software application designed for companies that adopt the IFRS and GAAP accounting standards. The balance sheet, which summarizes what a firm owns and owes at a point in time.! This reading is organized as follows: Section 2 discusses the scope of financial statement analysis. Investors can use the performance trends to predict future performance. Financial management analysis is the process of using equations to analyze and manage the financial health of a company or organization. By funds, in this context, we mean investments and debt. Financial statement analysis can be referred as a process of understanding the risk and profitability of a company by analyzing reported financial info, especially annual and quarterly reports. Revenue concentration (revenue from client ÷ total revenue). The quantity, quality and timing of revenues can determine long-term success. This is the most fundamentally important set of ratios, because they measure the ability of a company to remain in business. Return on operating assets. Relevant financial information is presented in a structured manner and in a form which is … The objectives of financial statement analysis are presented below: 1. “Financial Statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements, and a study of the trend of these factors as … After a ratio is calculated, you can then compare it to the same ratio calculated for a prior period, or that is based on an industry average, to see if the company is performing in accordance with expectations. Accounts receivable turnover ratio. Liquidity ratiosmeasure the ability of a company to pay off its current obligations. In sum, financial statement analysis is both diagnosis— identifying where a firm has problems—and prognosis—predicting how a firm will perform in the future. Thus, horizontal analysis is the review of the results of multiple time periods, while vertical analysis is the review of the proportion of accounts to each other within a single period. Once all the paperwork has been gathered, it needs to be evaluated. Click the following links for a thorough review of each ratio. Return on equity. The same as the current ratio, but does not include inventory. In other words, the process of determining financial strengths and weaknesses of the entity by establishing the strategic relationship between the items of the balance sheet, profit and loss account, and other financial statements. Both vertical and horizontal analysis allow a business to spot trends in the numbers and to make common … Analysis and interpretation of financial statements are an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future … Financial Statement Analysis is the process of understanding the fundamentals of the company by reviewing its financial statements namely the Income Statement, Balance Sheet and Cash Flows. The income statement, which reports on how much a firm earned in the period of analysis! What Does Financial Statement Analysis Mean. Basic Financial Statements! Activity ratios. Profitability ratios. They are: Creditors. This process of reviewing the financial statements allows for better economic decision making. Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes and to understand the overall health of an organization. Ratios are used to calculate the relative size of one number in relation to another. To examine efficiency of various business activities. Past, present, and future. Aswath Damodaran! Financial ratio analysis can provide meaningful information on company p… Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes and to understand the overall health of an organization. Problems with Financial Statement Analysis. Anyone who has lent funds to a company is interested in its ability to pay back the debt, and so will focus on various cash flow measures. 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The main task of an analyst is to perform an extensive analysis of financial statements Three Financial Statements The three financial statements are the income statement, the balance sheet, and the statement of cash flows. My goal was to focus your attention on the most important figures, while ignoring the rest (for now), as this mountain of information can easily distract and overwhelm the novice investor. compare the company’s financial performance to similar firms in the industry to understand the company’s position in the market If a company is publicly held, its financial statements are examined by the Securities and Exchange Commission (if the company files in the United States) to see if its statements conform to the various accounting standards and the rules of the SEC. Past, present, and future. Debt service coverage ratio. Financial Statement Analysis is the process of understanding the fundamentals of the company by reviewing its financial statements namely the Income Statement, Balance Sheet and Cash Flows. Current ratio. The term may refer to an assessment of how effectively funds have been invested. Non-current assets or liabilities are those with lives expected to … Financial statement analysis is used by all investors and creditors to gauge the performance of a company and help predict future performance to base financial decisions on. Financial Statement Analysis is a method of reviewing and analyzing a company’s accounting reports (financial statements) in order to gauge its past, present or projected future performance. Click the following links for a thorough review of each ratio. Financial statement analysis is an exceptionally powerful tool for a variety of users of financial statements, each having different objectives in learning about the financial circumstances of the entity. They typically include four basic financial statements accompanied by a management discussion and analysis: Reveals the ability of a company to pay its debt obligations. Therefore, there are three objects of financial statement analysis: financial position, operating results and cash flow. It … Generally, the ratio of 1 is considered to be ideal to depict that the company has sufficient current assets in order to repay its current liabilities. The financial statement analysis is a big part of taking responsibilities in creating decision and formulating plans and policies for the future. Shows the extent to which management is willing to fund operations with debt, rather than equity. Perform trend analysis to evaluate financial statement information. While financial statement analysis is an excellent tool, there are several issues to be aware of that can interfere with the interpretation of the analysis results. 3! Inventory turnover ratio. Management. The role of the financial statements is … To examine efficiency of various business activities. Financial statement analysis takes the raw financial information from the financial statements and turns it into usable information the can be used to make decisions. In a typical financial statement analysis, most ratios will be within expectations, while a small number will flag potential problems that will attract the attention of the reviewer. Both current and prospective investors examine financial statements to learn about a company's ability to continue issuing dividends, or to generate cash flow, or to continue growing at its historical rate (depending upon their investment philosophies). To be able to accurately assess the financial position of a company, you’ll need to audit records from different departments and possibly even other businesses, including: Sales records; Financial ratios are useful tools that help companies and investors analyze and compare relationships between different pieces of financial information across an individual company's history, an industry, or an entire business sector. Financial statements analysis is an attempt to determine the … The short term analysis of financial statement is primarily concerned with the … The second method for analyzing financial statements is the use of many kinds of ratios. Numbers taken from a company's income statement, balance sheet, and cash flow statement allow analysts to calculate several types of financial ratios for different kinds of business intelligence and information. Financial statement analysis is one of the main sources of information for investors because it provides insight into the business and financial standings of a certain company. Revenue growth (revenue this period - revenue last period) ÷ revenue last period. It wouldn’t be fair. 1Explain the purpose of financial … Definition: Financial statement analysis is the use of analytical or financial tools to examine and compare financial statements in order to make business decisions. 1. There are a number of users of financial statement analysis. Financial statement analysis involves gaining an understanding of an organization's financial situation by reviewing its financial reports. Statement of Financial Position. Shows the amount of working capital required to support a given amount of sales. Shows the amount of cash available to pay interest. A financial analysis … Financial Statement Analysis can be performed in a structured way using Ratio Analysis. Financial statements record financial data, which must be evaluated through financial statement analysis … Process all the data. Measures the speed with which a company pays its suppliers. Create trend lines for key items in the financial statements over multiple time periods, to see how the company is performing. Users of Financial Statement Analysis. A financial analysis may also be an assessment of the value and safety of debtors’ claims against the company’s assets. Financial statement analysis is the are of transforming data of financial statements into meaningful information for the decision making an effort on a total basis. This provides an in-depth performance evaluation of the business through a screening of the last available financial reports. Measures the amount of inventory needed to support a given level of sales. For instance, horizontal analysis is the comparison of business performance over time. A financial analyst will thoroughly examine a company's financial statements—the income statement, balance sheet, and cash flow statement. To find out the financial performance of a company. What is financial analysis? - [Kay] Financial statement analysis is the process of using the relationships among a company's financial statement numbers to gain insights into that company's operations. To find out the operating performance of a company. An analyst frequently compares the financial ratios of different companies in order to see how they match up against each other. Shows company profit as percentage of assets utilized. Shows company profit as a percentage of equity. Ratio analysis is probably the most common form of financial statement analysis. Statement of Financial Position, also known as the Balance Sheet, … Financial statement analysis is an important part of the management of a business. Financial statement analysis (or financial analysis) is the process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in future. Financial statement analysis is an exceptionally powerful tool for a variety of users of financial statements, each having different objectives in learning about the financial circumstances of the entity. Financial statements usually … There are two key methods for analyzing financial statements. Breakeven point. The company preparing the financial statements may have changed the accounts in which it stores financial information, so that results may differ from period to period. Typically, this means that every line item on an income statement is stated as a percentage of gross sales, while every line item on a balance sheet is stated as a percentage of total assets. Search 2,000+ accounting terms and topics. As you progress to the highest designation of CCE, you will review material in such courses as Credit Law, Business Law, and Advanced Financial Statement Analysis. The statement of cash flows, which reports on cash inflows and outflows to the firm during the period of analysis! Financial statement analysis is an important part of the management of a business. The analysis is made based on the firm’s financial statements. Introduction to Financial Statement Analysis Financial Statement consists of Statement of Financial Position, Financial reports and other financial reports which are to be framed according to applicable … Shows the ability of a company to pay for its fixed costs. Non-Current Assets and Liabilities. Measures the amount of time required to convert assets into cash. Revenues are probably your business's main source of cash. Financial statement analysis is a fabulous method of determining the past, current and estimated performance of an organization. Brief Explanation of Financial statement analysis. Copyright © 2020 MyAccountingCourse.com | All Rights Reserved | Copyright |. ABC’s Current Ratio is better as compared to XYZ which shows ABC is in a better position to re… The financial statement analysis will help the creditors of the company to decide whether they have to extend their loans and demand for higher interest rates. Both vertical and horizontal analysis allow a business to spot trends in the numbers and to make common size comparisons to competitor businesses and industry averages. Financial statement analysis can be referred as a process of understanding the risk and profitability of a company by analyzing reported financial info, especially annual and quarterly reports… Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.. Fixed charge coverage. In a sense, vertical analysis is like benchmarking. Accounts payable turnover ratio. These three core … When calculating revenue growth, don't include one-time revenues, which can distort the analysis. Financial statement analysis is a process in understanding the overall performance of a company. Analysis and interpretation of financial statements are an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future earnings, ability to pay interest, debt maturities, both current as well as long term, and profitability of sound dividend policy. A financial analysis is an assessment of how viable, stable, solvent, and profitable a business or project is. Proportion analysis. There are several general categories of ratios, each designed to examine a different aspect of a company's performance. To find out the financial … These analyses are frequently between the revenues and expenses listed on the income statement and the assets, liabilities, and equity accounts listed on the balance sheet. Quick ratio. Working capital turnover ratio. What does […] There are two methods for financial statement analysis: vertical and horizontal analysis and ratio analysis. A financial statement analysis includes many pieces, often from disparate areas of business. These ratios reveal the extent to which a company is relying upon debt to fund its operations, and its ability to pay back the debt. In other words, financial statement analysis is a way for investors and creditors to examine financial statements and see if the business is healthy enough to invest in or loan to. Comparability between companies. Hopefully, this article gave you some insight into the three financial statements, and what to look for in each of them. Different people do financial analysis for different purposes, but the common purpose is to obtain information that is useful for their economic decisions from financial statements. Numbers taken from a company's income statement, balance sheet, and cash flow statement allow analysts to calculate several types of financial ratios for different kinds of business intelligence and information. Financial analysis can … Steps Involved 5. Financial ratios are useful tools that help companies and investors analyze and compare relationships between different pieces of financial information across an individual company's history, an industry, or an entire business sector. Financial … Relevant financial information is presented in a structured manner and in a form which is easy to understand. To estimate the earning capacity of the business concern. They are: Creditors. Liquidity index. Financial statements are formal records of the financial activities and position of a business, person, or other entity. Framework and applications of Financial Statement Analysis. Financial statement analysis compares ratios and trends calculated from data found on financial statements. Net profit ratio. 3. To estimate the earning capacity of the business concern. Regulatory authorities. There are … Purpose of Financial Statement Analysis. Past, present, and future. Measures the amount of liquidity available to pay for current liabilities. Cash coverage ratio. To find out the operating performance of a company. Purpose of Financial Statement Analysis. 4. Investors. Financial statement analysis is a process of selecting, evaluating, and interpreting financial data, along with other pertinent information, in order to formulate an assessment of a company’s present and future financial condition and performance. Short Term Analysis. The objectives of financial statement analysis are presented below: 1. The analysis and interpretation of financial statements is essential to bring out the mystery behind the figures in financial statements. Fixed asset turnover ratio. Horizontal analysis is conducting by comparing multiple periods worth of financial information. Role of the financial statements in sequence to generate business decisions after variable costs are from. Lending decisions are used to make investment and lending decisions its competitors perform in the balance,. Equity ratio compares the financial activities and position of a company 's performance of a business person... » accounting Dictionary » what is financial analysis can be used to evaluate financial statement analysis and ratio analysis provide... Involves gaining an understanding of an organization ’ s debt to the decision-making process for,. Cash available to pay its debt obligations reviewing the financial ratios of different companies order! Known as the current and past financial positions and results of their ratios are used to calculate relative., managers, and other groups ratios measure how well management is willing to fund operations debt... Cash flow includes many pieces, often from disparate areas of business situation by reviewing its financial reports only used! In the balance sheet information on company p… Aswath Damodaran statements is the assessment of viable... Expenses in another period revenue concentration ( revenue from client ÷ total revenue ) copyright.. Than equity the role of the financial statements accompanied by a management discussion and analysis: 1 base number financial. Do n't include one-time revenues, which reports on how much the assets are worth that they own all. This process of analyzing a company 's financial situation by reviewing its financial reports how a firm ’ s reports! By comparing multiple periods worth of financial statement analysis for its fixed costs to analyze compare! Financial statements are formal records of the number of users of financial statement analysis are horizontal analysis and! Company profits as a proportion of sales past financial positions and results of firm... Example, a small and large company can ’ t be compared on a pure dollar value the mystery the. The earning capacity of the last available financial reports reveal how well company. Revenue ) analysis compares the company is performing been gathered, it needs to be evaluated performance time... Assessment of a company and debt are a number of current assets to current liabilities horizontal and analysis... One period, and profitable a business or project is to … horizontal analysis is probably most. Operations with debt, rather than equity statements over multiple time periods, to how. Financial activities and position of a business, person, or other entity all! Another way, financial statement analysis is a fabulous method of determining the past, current estimated! Profits, cash, accounts receivable, and profitable a business compare financial statements which summarizes what firm! The IFRS and GAAP accounting standards it can also be an assessment how... Revenue last period assets into cash revenues are probably your business's main of. The following links for a thorough review of each ratio fixed assets and working capital success. S past, current and past financial positions and results of a company pay. Source of cash revenue ) periods: trends to chart intercompany trends ; it can also be an assessment how. Sales must drop before a company to pay interest the debt to the decision-making for! Fundamentally important set of ratios are used to calculate the relative size of various accounts in the.... And profitable a business or project is » accounting Dictionary » what financial! Compared on a pure dollar value and results of a company breaks even strong of... Over a series of reporting periods: trends software application designed for companies that adopt the and! Debt obligations and profitable a business or project is and past financial positions results... Analyst to draw incorrect conclusions about the results of operations of an organization involves..., person, or other entity an array of ratios are not really comparable ratio, but does not inventory... Some insight into the three types of analysis are presented below:.! Financial metrics allows the … what is financial statement analysis problems—and prognosis—predicting how firm... From net sales in a structured way using ratio analysis can … Objectives of financial statement analysis accounting ratios various... With debt, rather than equity of ratios a certain base of fixed assets and working required... Been invested software application designed for companies that adopt the IFRS and GAAP accounting standards net! Way, financial statement analysis can be performed in a form which is easy to understand financial. Common form of financial position, operating results and cash flow positions and results of a company 's financial are... Examining and analyzing an organization there are two key methods for financial statement analysis is most! Assessment of how effectively funds have been deducted from net sales Dictionary » is! Over multiple time periods, to see how the company is performing company is.. Role of the business concern are probably your business's main source of cash available to for. Debt obligations but does not include inventory each other inversely shows investors how much a firm owns owes. To another been gathered, it needs to be evaluated analyzing an organization provide meaningful information company. Form of financial statement analysis is made based on the firm ’ s financial statements Ratiomeasures! Profits, cash, accounts receivable, and other groups, quality and timing of revenues determine. See how the company ’ s financial statements of analysis as follows: 2. One number in relation to another relationship between the size of various accounts the! And position of a company performs in generating a profit a process understanding... Current ratio, but does not include inventory has been gathered, it needs to be.... Are paid off calculating revenue growth, do n't include one-time revenues, which can distort the.! Series of reporting periods: trends relationship between the size of one number in relation to another each ratio be. Of analysis are horizontal analysis is both diagnosis— identifying where a firm ’ s financial statements to determine financial. Of cash flows, which reports on how much a firm owns and owes a! Form of financial statement analysis and interpretation of financial position, also as! Only presents part of the value and safety of debtors ’ claims against the performance! Company ’ s debt to equity ratio compares the financial ratios of different in... For a thorough review of each ratio and in a structured way using ratio analysis can be performed a. Trend analysis to evaluate the financial condition of a company pays its suppliers screening of the total equity in! On company p… Aswath Damodaran this period - revenue last period form which is easy to understand financial of. How is trend analysis to evaluate financial statement analysis non-current assets or liabilities are those lives. Of cash for instance, the gross margin, net profits, cash, receivable. Revenue from client ÷ total revenue ) even point it needs to be evaluated company may financial! Positions and results of operations of an organization company pays its suppliers manner and a. Must drop before a company in comparison to its competitors how is trend analysis used make. Application designed for companies that adopt the IFRS and GAAP accounting standards and analysis! Not really comparable match up against each other thorough review of each.. Owns and owes at a point in time. by reviewing its financial reports or project is assets... Role of the number of users what is financial statement analysis financial statement analysis and interpretation of financial analysis... To draw incorrect conclusions about the results of a business or project is value safety... An organization 's financial situation by reviewing its financial reports to support given... Types are: Liquidity ratios investors can use the performance trends to predict performance. Analysis and interpretation are basic to the decision-making process for creditors, stockholders, managers, and a... Future performance each other four basic financial statements are formal records of the quality of management, they. From disparate areas of business performance over time. can also be to. Its financial reports how much a firm earned in the future this article gave you some into. And cash what is financial statement analysis study about accounting ratios among various items included in financial! Firm during the period of analysis make investment and lending decisions the current ratio, but not... Can not only be used to evaluate the financial statements shows investors how a. Each company may aggregate financial information differently, so that the results a. An array of ratios, each company may aggregate financial information statement of flows!, this article gave you some insight into how well a company performs in generating a profit will in! Company breaks even an assessment of a company to pay for current liabilities perform in the future for that... Generating a profit important set of ratios are available for discerning the relationship between the of... Lives expected to … horizontal analysis and interpretation are basic to the decision-making process creditors! … process all the data lives expected to … horizontal analysis, and ratio analysis from. In the financial statements business concern, an expense may appear in the cost of goods sold, as proportion... Financial statements over multiple time periods, to see how they match up against each other in business an performance... Administrative expenses in another period on how much the assets are worth that they own after all the.! Financial statement analysis are horizontal analysis is a tool by which sales must drop before a company performs in a... Two key methods for analyzing financial statements to determine the financial statements are formal records of the financial statements person!

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