4 Completing the Accounting Cycle

Learning Objectives

1 Prepare a worksheet.

2 Prepare closing entries and a post-closing trial balance.

Explain the steps in the accounting cycle and how to prepare

3 correcting entries.

4 Identify the sections of a classified balance sheet.

4-1
LEARNING
OBJECTIVE
1 Prepare a worksheet.

Worksheet
 Multiple-column form used in preparing financial
statements.
 Not a permanent accounting record.
 May be a computerized worksheet using an electronic
spreadsheet program such as Excel.
 Prepared using a five-step process.
 Use of worksheet is optional.

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 Steps in Preparing a Worksheet
Illustration 4-1

4-3
 Steps in Preparing a Worksheet Illustration 4-2

STEP 1: PREPARE A TRIAL BALANCE ON THE WORKSHEET

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500
Prepaid Insurance 600
Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
Owner's Capital 10,000
Owner's Drawings 500
Service Revenue 10,000

Salaries and Wages Exp. 4,000

Rent Exp. 900
Totals 28,700 28,700

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

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 Steps in Preparing a Worksheet
Illustration 3-23
General journal
showing adjusting
entries

Adjusting
Journal
Entries
(Chapter 3)

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LO 1
 Steps in Preparing a Worksheet Illustration 4-3

STEP 2: ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500 (a) 1,500
Prepaid Insurance 600 (b) 50
Equipment 5,000 Adjustments Key:
Notes Payable 5,000
Accounts Payable 2,500
(a) Supplies Used.
Unearned Revenue 1,200 (d) 400 (b) Insurance Expired.
Owner's Capital 10,000
Owner's Drawings 500
(c) Depreciation Expensed.
Service Revenue 10,000 (d) 400 (d) Service Revenue Recognized.
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 (e) Service Revenue Accrued.
Rent Exp. 900 (f) Interest Accrued.
Totals 28,700 28,700
Supplies Expense (a) 1,500
(g) Salaries Accrued.
Insurance Expense (b) 50
Accumulated Depreciation (c) 40
Depreciation Expense (c) 40
Accounts Receivable (e) 200
Interest Expense 50
Enter adjustment amounts, total
(f)
Interest Payable (f) 50 adjustments columns,
Salaries and Wages Payable (g) 1,200 and check for equality.
Totals 3,440 3,440

Add additional accounts as needed.

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 Steps in Preparing a Worksheet Illustration 4-4

STEP 3: COMPLETE THE ADJUSTED TRIAL BALANCE COLUMNS

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Owner's Capital 10,000 10,000
Owner's Drawings 500 500
Service Revenue 10,000 (d) 400 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200
Rent Exp. 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500
Insurance Expense (b) 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40
Accounts Receivable (e) 200 200
Interest Expense (f) 50 50
Interest Payable (f) 50 50
Salaries and Wages Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190
Net Income
Totals Totalthe adjusted trial balance
columns and check for equality.
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 Steps in Preparing a Worksheet Illustration 4-5

STEP 4: EXTEND AMOUNTS TO FINANCIAL STATEMENT COLUMNS

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Revenue 1,200 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000
Owner's Drawings 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200 5,200
Rent Exp. 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income
Totals Extend adjusted trial balance amounts to
appropriate financial statement columns.
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 Steps in Preparing a Worksheet Illustration 4-6

STEP 5: TOTAL COLUMNS, COMPUTE NET INCOME (LOSS)

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Revenue 1,200 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000
Owner's Drawings 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200 5,200
Rent Exp. 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income 2,860 2,860
Totals 10,600 10,600 22,450 22,450
Compute Net Income or Net Loss.
4-9 LO 1
 Steps in Preparing a Worksheet

Question
Net income is shown on a worksheet in the:
a. income statement debit column only.
b. balance sheet debit column only.
c. income statement credit column and balance sheet debit
column.
d. income statement debit column and balance sheet credit
column.

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 Preparing Financial Statements from a
Worksheet

 Income statement is prepared from the income statement

columns.
 Balance sheet and owner’s equity statement are
prepared from the balance sheet columns.
 Companies can prepare financial statements before they
journalize and post adjusting entries.

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 Preparing Statements from a Worksheet

Illustration 4-7
Financial statements from
a worksheet

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 Preparing Statements from a Worksheet

Illustration 4-7
Financial statements from
a worksheet

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 Illustration 4-7

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 Preparing Adjusting Entries from a
Worksheet

 Adjusting entries are prepared from the adjustments

columns of the worksheet.
 Journalizing and posting of adjusting entries follows the
preparation of financial statements when a worksheet is
used.

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 DO IT! 1 Worksheet

Susan Elbe is preparing a worksheet. Explain to Susan how she should

extend the following adjusted trial balance accounts to the financial
statement columns of the worksheet.

Cash Balance sheet (debit column)

Accumulated Depreciation Balance Sheet (credit column)
Accounts Payable Balance Sheet (credit column)
Owner’s Drawings Balance sheet (debit column)
Service Revenue Income statement (credit column)
Salaries and Wages Expense Income statement (debit column)

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 LEARNING Prepare closing entries and a post-closing
2
OBJECTIVE trial balance.

At the end of the accounting period, the company makes the

accounts ready for the next period.

Illustration 4-8
Temporary versus permanent accounts
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 Preparing Closing Entries

Closing entries formally recognize in the ledger the transfer of

 net income (or net loss) and
 owner’s drawings
to owner’s capital.

Companies generally journalize and post closing entries only at the

end of the annual accounting period.
Closing entries produce a zero balance in each temporary account.

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 Preparing Closing Entries

Illustration 4-9
Diagram of closing process
—proprietorship

Owner’s Capital is a
permanent account. All
other accounts are
temporary accounts.

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 Preparing Closing Entries

CLOSING
ENTRIES
ILLUSTRATED

Illustration 4-10
Closing entries
4-20 journalized
 Posting
Closing
Entries

Illustration 4-11

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4-22 LO 2
 Preparing a Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account balances carried

forward into the next accounting period. Illustration 4-12
Post-closing trial balance

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 DO IT! 2 Closing Entries

The worksheet for Hancock Company shows the following in the

financial statement columns:
Owner’s Drawings $15,000
Owner’s Capital $42,000
Net income $18,000
Prepare the closing entries at December 31 that affect owner’s
capital.

Income Summary 18,000

Owner’s Capital 18,000
Owner’s Capital 15,000
Owner’s Drawings 15,000
4-24 LO 2
 LEARNING Explain the steps in the accounting cycle and
3
OBJECTIVE how to prepare correcting entries.

Illustration 4-15
1.
1. Analyze
Analyze business
business transactions
transactions

9.
9. Prepare
Prepare aa post-closing
post-closing trial
trial 2.
2. Journalize
Journalize the
the transactions
transactions
balance
balance

8.
8. Journalize
Journalize and
and post
post closing
closing 3.
3. Post
Post to
to ledger
ledger accounts
accounts
entries
entries

7.
7. Prepare
Prepare financial
financial statements
statements 4.
4. Prepare
Prepare aa trial
trial balance
balance

6.
6. Prepare
Prepare an
an adjusted
adjusted trial
trial 5.
5. Journalize
Journalize and
and post
post adjusting
adjusting
balance
balance entries
entries

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LO 3
 Correcting Entries—An Avoidable Step

 Unnecessary if accounting records are free of errors.

 Made whenever an error is discovered.
 Must be posted before closing entries.

Instead of preparing a correcting entry, it is possible to reverse the

incorrect entry and then prepare the correct entry.

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 Correcting Entries—An Avoidable Step

CASE 1: On May 10, Mercato Co. journalized and posted a $50 cash
collection on account from a customer as a debit to Cash $50 and a credit to
Service Revenue $50. The company discovered the error on May 20, when the
customer paid the remaining balance in full.

Incorrect entry Cash 50

Service Revenue
50
Correct entry Cash 50
Accounts Receivable
50
Correcting Service Revenue 50
entry Accounts Receivable
50
4-27 LO 3
 Correcting Entries—An Avoidable Step

CASE 2: On May 18, Mercato purchased on account equipment costing

$450. The transaction was journalized and posted as a debit to Equipment $45
and a credit to Accounts Payable $45. The error was discovered on June 3.

Incorrect entry Equipment 45

Accounts Payable
45
Correct entry Equipment 450
Accounts Payable
450
Correcting Equipment 405
entry Accounts Payable
405
4-28 LO 3
4-29 LO 3
 DO IT! 3 Correcting Entries

Sanchez Company discovered the following errors made in January

2017 .

1. A payment of Salaries and Wages Expense of $600 was debited to

Supplies and credited to Cash, both for $600.

2. A collection of $3,000 from a client on account was debited to

Cash $200 and credited to Service Revenue $200.

3. The purchase of supplies on account for $860 was debited to

Supplies $680 and credited to Accounts Payable $680.

Correct the errors without reversing the incorrect entry.

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 DO IT! 3 Correcting Entries

Sanchez Company discovered the following errors made in January

2017 .

1. A payment of Salaries and Wages Expense of $600 was debited to

Supplies and credited to Cash, both for $600.

Correct the error without reversing the incorrect entry.

Salaries and Wages Expense 600

Supplies 600

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 DO IT! 3 Correcting Entries

Sanchez Company discovered the following errors made in January

2017 .

2. A collection of $3,000 from a client on account was debited to

Cash $200 and credited to Service Revenue $200.

Correct the error without reversing the incorrect entry.

Service Revenue 200

Cash 2,800
Accounts Receivable 3,000

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 DO IT! 3 Correcting Entries

Sanchez Company discovered the following errors made in January

2017 .

3. The purchase of supplies on account for $860 was debited to

Supplies $680 and credited to Accounts Payable $680.

Correct the error without reversing the incorrect entry.

Supplies ($860 - $680) 180

Accounts Payable 180

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 LEARNING Identify the sections of a classified balance
4
OBJECTIVE sheet.

 Presents a snapshot at a point in time.

 To improve understanding, companies group similar assets
and similar liabilities together.

Standard Classifications Illustration 4-20

Assets Liabilities and Owner’s Equity

Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and equipment Owner’s (Stockholders’) equity
Intangible assets

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 The Classified Balance Sheet
Illustration 4-21

4-35 LO 4
 The Classified Balance Sheet
Illustration 4-21

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 Current Assets

 Assets that a company expects to convert to cash or

use up within one year or the operating cycle, whichever
is longer.
 Operating cycle is the average time that it takes to
purchase inventory, sell it on account, and then collect
cash from customers.

4-37 LO 4
 Current Assets
Illustration 4-22

Usually listed in the order they expect to convert them into cash.

4-38 LO 4
 Current Assets

Question
The correct order of presentation in a classified balance sheet for the
following current assets is:
a. accounts receivable, cash, prepaid insurance, inventory.
b. cash, inventory, accounts receivable, prepaid insurance.
c. cash, accounts receivable, inventory, prepaid insurance.
d. inventory, cash, accounts receivable, prepaid insurance.

4-39 LO 4
 Long-Term Investments

 Investments in stocks and bonds of other companies.

 Investments in long-term assets such as land or buildings that is
not currently being used in operating activities.
 Long-term notes receivable.
Illustration 4-23

4-40 LO 4
 Property, Plant, and Equipment

 Long useful lives.

 Currently used in operations.
 Depreciation - allocating the cost of assets to a number of
years.
 Accumulated depreciation - total amount of depreciation
expensed thus far in the asset’s life.

4-41 LO 4
 Property, Plant, and Equipment

Illustration 4-24

4-42 LO 4
 Intangible Assets

 Long-lived assets that do not have physical substance.

Illustration 4-25

4-43 LO 4
 The Classified Balance Sheet

Question
Patents and copyrights are
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.

4-44 LO 4
4-45 LO 4
 Current Liabilities

 Obligations the company is to pay within the coming year or its

operating cycle, whichever is longer.
 Usually list notes payable first, followed by accounts payable.
Other items follow in order of magnitude.
 Common examples are accounts payable, salaries and wages
payable, notes payable, interest payable, income taxes payable
current maturities of long-term obligations.
 Liquidity - ability to pay obligations expected to be due within
the next year.

4-46 LO 4
 Current Liabilities

Illustration 4-26

4-47 LO 4
4-48 LO 4
 Long-Term Liabilities

 Obligations a company expects to pay after one year.

Illustration 4-27

4-49 LO 4
 The Classified Balance Sheet

Question
Which of the following is not a long-term liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable

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 Owner’s Equity

 Proprietorship - one capital account.

 Partnership - capital account for each partner.
 Corporation - Common Stock and Retained Earnings.

Illustration 4-28

4-51 LO 4
 DO IT! 4 Balance Sheet Classifications

The following accounts were taken from the financial statements of Callahan
Company.

Match each of the following accounts to its proper balance sheet classification,
shown below. If the item would not appear on a balance sheet, use “NA.”
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Long-term liabilities (LTL)
Property, plant, and equipment (PPE) Owner’s equity (OE)
Intangible assets (IA)

4-52 LO 4
 LEARNING
OBJECTIVE
5 APPENDIX 4A: Prepare reversing entries.

Reversing Entries
 It is often helpful to reverse some of the adjusting entries before
recording the regular transactions of the next period.
 Companies make a reversing entry at the beginning of the next
accounting period.
 Each reversing entry is the exact opposite of the adjusting entry
made in the previous period.
 The use of reversing entries does not change the amounts
reported in the financial statements.

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 Reversing Entries Example

Illustration: To illustrate the optional use of reversing entries for accrued

expenses, we will use the salaries expense transactions for Pioneer
Advertising.
1. October 26 (initial salary entry): Pioneer pays $4,000 of salaries and wages
earned between October 15 and October 26.

2. October 31 (adjusting entry): Salaries and wages earned between October 29

and October 31 are $1,200. The company will pay these in the November 9
payroll.

3. November 9 (subsequent salary entry): Salaries and wages paid are $4,000.
Of this amount, $1,200 applied to accrued salaries and wages payable and
$2,800 was earned between November 1 and November 9.

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 Reversing Entries Example
Illustration 4A-1

With Reversing Entries

(per appendix)

Initial Salary Entry

Oct. 26 Same entry

Adjusting Entry
Oct. 31 Same entry

Closing Entry
Oct. 31 Same entry

Reversing Entry
Nov. 1 Salaries and Wages Payable 1,200
Salaries and Wages Expense
1,200
Subsequent Salary Entry
Nov. 9 Salaries and Wages Expense 4,000
Cash 4,000

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 Reversing Entries Example
Illustration 4A-2
Postings with
reversing
entries

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 A Look at IFRS

LEARNING Compare the procedures for the closing process

OBJECTIVE
6 under GAAP and IFRS.

Key Points
Similarities
 The procedures of the closing process are applicable to all companies,
whether they are using IFRS or GAAP.
 IFRS generally requires a classified statement of financial position similar
to the classified balance sheet under GAAP.
 IFRS follows the same guidelines as this textbook for distinguishing
between current and noncurrent assets and liabilities.

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 A Look at IFRS

Key Points
Differences
 IFRS recommends but does not require the use of the title “statement of
financial position” rather than balance sheet.
 The format of statement of financial position information is often
presented differently under IFRS.
 Although no specific format is required, many companies that follow
IFRS present statement of financial position information in this order:
 Non-current assets
 Current assets  Non-current liabilities
 Equity  Current liabilities

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 A Look at IFRS

Key Points
Differences
 Under IFRS, current assets are usually listed in the reverse order of
liquidity. For example, under GAAP cash is listed first, but under IFRS it
is listed last.
 Both GAAP and IFRS are increasing the use of fair value to report
assets. However, at this point IFRS has adopted it more broadly. As
examples, under IFRS, companies can apply fair value to property, plant,
and equipment, and in some cases intangible assets.

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 A Look at IFRS

Looking to the Future

The IASB and the FASB are working on a project to converge their standards
related to financial statement presentation. A key feature of the proposed
framework is that each of the statements will be organized in the same format,
to separate an entity’s financing activities from its operating and investing
activities and, further, to separate financing activities into transactions with
owners and creditors. Thus, the same classifications used in the statement of
financial position would also be used in the income statement and the statement
of cash flows. The project has three phases. You can follow the joint financial
presentation project at the following link: http://www.fasb.org/project/
financial_statement_presentation.shtml .

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 A Look at IFRS

IFRS Self-Test Questions

Companies that use IFRS:

a) may report all their assets on the statement of financial position at fair
value.
b) may offset assets against liabilities and show net assets and net liabilities
on their statements of financial position, rather than the underlying
detailed line items.
c) may report non-current assets before current assets on the statement of
financial position.
d) do not have any guidelines as to what should be reported on the
statement of financial position.
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 A Look at IFRS

IFRS Self-Test Questions

A company has purchased a tract of land and expects to build a production plant
on the land in approximately 5 years. During the 5 years before construction,
the land will be idle. Under IFRS, the land should be reported as:
a) land expense.

b) property, plant, and equipment.

c) an intangible asset.

d) a long-term investment.

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 A Look at IFRS

IFRS Self-Test Questions

Current assets under IFRS are listed generally:

a) by importance.
b) in the reverse order of their expected conversion to cash.

c) by longevity.

d) alphabetically.

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 Copyright

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4-64