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Managerial Accounting

CONNECT FEATURES

Interactive Presentations Interactive Presentations cover each chapter’s core learning objectives with narrated, animated presentations that pause frequently to check for comprehension. Interactive Presentations harness the full power of technology to appeal to all learning styles. Interactive Presentations are a great way to improve online or hybrid sections, but also extend the learning opportunity for traditional classes, such as in facilitating a “fl ipped classroom.”

End-of-Chapter Material McGraw-Hill Education redesigned the student interface for our end-of-chapter assessment content. The new interface provides improved answer acceptance to reduce students’ frustration with formatting issues (such as rounding) and, for select questions, provides an expanded table that guides students through the process of solving the problem. Many questions have been redesigned to more fully test students’ mastery of the content.

Guided Examples Guided Examples provide narrated and animated step-by-step walkthroughs of algorithmic versions of assigned exercises. This allows students to identify, review, or reinforce the concepts and activities covered in class. Guided Examples provide immediate feedback and focus on the areas where students need the most guidance.

Connect generates comprehensive reports and graphs that provide instructors with an instant view of the performance of individual students, a specifi c section, or multiple sections. Since all content is mapped to learning objectives, Connect reporting is ideal for accreditation or other administrative documentation.

General Ledger New to 5e are General Ledger problems that offer students the ability to see how transactions post from the general journal all the way through the fi nancial statements. General Ledger (GL) questions provide auto-grading in the same intelligent design as our end-of-chapter content. Critical thinking and analysis components are added to each GL problem to ensure understanding of the entire process.

POWERFUL PERFORMANCE REPORTING

Connect Insight The fi rst and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed by an intuitive question and provide at-a-glance information regarding how an instructor’s class is performing. Connect Insight is available through Connect titles.

Excel Simulations Assignable within Connect Accounting, Excel Simulations allow students to practice their Excel skills—such as basic formulas and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me tutorials (when enabled). These simulations are auto-graded and provide instant feedback to the student.

Managerial Accounting 5thedition

John J. Wild University of Wisconsin at Madison

Ken W. Shaw University of Missouri at Columbia

To my students and family, especially Kimberly, Jonathan, Stephanie and Trevor. To my wife Linda and children Erin, Emily and Jacob.

MANAGERIAL ACCOUNTING, FIFTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2016 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2013, 2011, and 2009. No part of this pub- lication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN 978-1-259-17649-4 MHID 1-259-17649-5

Senior Vice President, Products & Markets: Kurt L. Strand Vice President, General Manager, Products & Markets: Marty Lange Vice President, Content Design & Delivery: Kimberly Meriwether David Managing Director: Tim Vertovec Marketing Director: Brad Parkins Brand Manager: Steve Schuetz Director, Product Development: Rose Koos Director of Digital Content: Patricia Plumb Lead Product Developer: Ann Torbert Product Developer: Lindsey Schauer Marketing Manager: Michelle Nolte Digital Product Analyst: Xin Lin Director, Content Design & Delivery: Linda Avenarius Program Manager: Daryl Horrocks Content Project Managers: Lori Koetters, Brian Nacik Buyer: Carol A. Bielski Design: Debra Kubiak Content Licensing Specialists: DeAnna Dausener, Keri Johnson Cover Image: Yuri_Arcurs/Getty Images Compositor: Aptara®, Inc. Printer: R.R. Donnelley

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Control Number: 2014957125

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

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Managerial Accounting, 5e

Adapting to the Needs of Today’s Students

Enhancements in technology have changed how we live and learn. Working with learning resources across devices, whether smartphones, tablets, or laptop computers, empowers students to drive their own learning by putting increasingly intelligent technology into their hands.

Whether the goal is to become an accountant, a business- person, or simply an informed consumer of accounting information, Managerial Accounting (MA) has helped gen- erations of students succeed. Its leading-edge accounting content, paired with state-of-the-art technology, supports student learning and elevates understanding of key accounting principles.

MA excels at engaging students with content that will help them see the relevance of accounting. Its chapter- opening vignettes showcase dynamic, successful entrepreneurial indi- viduals and companies and highlight the usefulness of accounting to business owners. This edition’s featured com- panies—Apple, Google, and Samsung— capture student interest with their products, and their annual reports serve as a pathway for learning financial statements. New in this edition, Need-to-Know illustrations in each chapter demon- strate how to apply key accounting procedures. They are supported by guided video presentations.

MA also delivers innovative technology to help student per- formance. Connect Accounting provides students with a media-rich eBook version of the textbook and offers instant grading and feedback for assignments that are completed online. Our system for completing exercise and problem material takes accounting content to the next level, deliver- ing assessment material in a more intuitive, less restrictive format that adapts to the needs of today’s students.

This technology features:

• an auto-calculation feature that allows students to focus on concepts rather than rote tasks.

• a smart (auto-fill) drop-down design. • a general journal interface that looks and feels more

like that found in practice.

The end result is content that better prepares students for the real world.

Connect Accounting also includes digitally based, interactive, adaptive learning tools that provide an opportunity to

engage students more effectively by offering varied instructional methods and more personalized learning paths that build on different learning styles, interests, and abilities.

The revolutionary technology of the LearnSmart Advantage Series—consisting of LearnSmart® and SmartBook®—is available only from McGraw-Hill Education. These prod- ucts are based on an intelligent learning system that uses a series of adaptive questions to pinpoint each student’s knowledge gaps and then provides an optimal learning path. Students spend less time in areas they already know and more time in areas they don’t. The result: Students study more efficiently, learn faster, and retain more knowl- edge. Valuable reports provide insights into how students are progressing through textbook content and informa- tion useful for shaping in-class time or assessment.

Interactive Presentations teach each chapter’s core learn- ing objectives in a rich, multimedia format, bringing the content to life. Your students will come to class prepared when you assign Interactive Presentations. Students can also review the Interactive Presentations as they study. Further, Guided Examples provide students with narrated, animated, step-by-step walk-throughs of algorithmic ver- sions of assigned exercises. Students appreciate the Guided Examples, which help them learn accounting and complete assignments outside of class.

A General Ledger (GL) application, new to 5e, offers stu- dents the ability to see how transactions post from the general journal all the way through the financial state- ments. It uses the intuitive, less restrictive format used for other homework, and it adds critical thinking components to each GL question, to ensure understanding of the entire process.

The first and only analytics tool of its kind, Connect Insight® is a series of visual data displays—each framed by an intuitive question—to provide at-a-glance information about how your class is doing. Connect Insight provides a quick analysis on five key dimensions, available at a moment’s notice from a tablet device: How are my stu- dents doing? How is my section doing? How is this student doing? How are my assignments going? and How is this assignment going?

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“This is an excellent book that is well-written and contains excellent illustrations. It has the best online supplements of any of the texts that I have reviewed. . . . This is an excellent book that I would recommend to all of my colleagues.”

—KAREN CRISONINO, County College of Morris

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JOHN J. WILD is a distinguished pro- fessor of accounting at the University of Wisconsin at Madison. He previously held appointments at Michigan State University and the University of Manchester in England. He received his BBA, MS, and PhD from the University of Wisconsin.

Professor Wild teaches accounting courses at both the undergraduate and graduate levels. He has received numerous

teaching honors, including the Mabel W. Chipman Excellence-in- Teaching Award, the departmental Excellence-in-Teaching Award, and the Teaching Excellence Award from the 2003 and 2005 busi- ness graduates at the University of Wisconsin. He also received the Beta Alpha Psi and Roland F. Salmonson Excellence-in-Teaching Award from Michigan State University. Professor Wild has received several research honors and is a past KPMG Peat Marwick National Fellow and is a recipient of fellowships from the American Accounting Association and the Ernst and Young Foundation.

Professor Wild is an active member of the American Accounting Association and its sections. He has served on several committees of these organizations, including the Outstanding Accounting Educator Award, Wildman Award, National Program Advisory, Publications, and Research Committees. Professor Wild is author of Fundamental Accounting Principles, Financial Accounting, Financial and Managerial Accounting, and College Accounting, each published by McGraw-Hill Education. His research articles on accounting and analysis appear in The Accounting Review; Journal of Accounting Research; Journal of Accounting and Economics; Contemporary Accounting Research; Journal of Accounting, Auditing and Finance; Journal of Accounting and Public Policy; and other journals. He is past associate editor of Contemporary Accounting Research and has served on several editorial boards including The Accounting Review. Professor Wild is a recognized expert in accounting and financial analysis, and is known for his teaching innovations within an active learning classroom environment.

In his leisure time, Professor Wild enjoys hiking, sports, travel, people, and spending time with family and friends.

KEN W. SHAW is an associate professor of accounting and the Deloitte Professor of Accounting at the University of Missouri. He previously was on the faculty at the University of Maryland at College Park. He has also taught in international programs at the University of Bergamo (Italy) and the University of Alicante (Spain). He received an accounting degree from Bradley University and an MBA and PhD from the University of Wisconsin. He is a Certified

Public Accountant with work experience in public accounting. Professor Shaw teaches accounting at the undergraduate and

graduate levels. He has received numerous School of Accountancy, College of Business and university-level teaching awards. He was voted the “Most Influential Professor” by three School of Accountancy graduating classes, and is a two-time recipient of the O’Brien Excellence in Teaching Award. He is the advisor to his school’s chapter of the Association of Certified Fraud Examiners.

Professor Shaw is an active member of the American Accounting Association and its sections. He has served on many committees of these organizations and presented his research papers at national and regional meetings. Professor Shaw’s research appears in the Journal of Accounting Research; The Accounting Review; Contemporary Accounting Research; Journal of Financial and Quantitative Analysis; Journal of the American Taxation Association; Strategic Management Journal; Journal of Accounting, Auditing, and Finance; Journal of Financial Research; and other journals. He has served on the editorial boards of Issues in Accounting Education; Journal of Business Research; and Research in Accounting Regulation. Professor Shaw is co-author of Fundamental Accounting Principles, Financial and Managerial Accounting, and College Accounting, all published by McGraw-Hill Education.

In his leisure time, Professor Shaw enjoys tennis, cycling, music, and coaching his children’s sports teams.

About the Authors

Dear Colleagues and Friends,

As we roll out the new edition of Managerial Accounting, we thank each of you who provided suggestions to improve the textbook and its teaching resources. This new edition reflects the advice and wisdom of many dedicated reviewers, symposium and workshop participants, students, and instructors. Throughout the revision process, we steered this textbook and its teaching tools in the man- ner you directed. As you’ll find, the new edition offers a rich set of features— especially digital features—to improve student learning and assist instructor teaching and grading. We believe you and your students will like what you find in this new edition.

Many talented educators and professionals have worked hard to create the mate- rials for this product, and for their efforts, we’re grateful. We extend a special thank-you to our contributing and technology supplement authors, who have worked so diligently to support this product:

Contributing Author: Kathleen O’Donnell, Onondaga Community College Accuracy Checkers: Dave Krug, Johnson County Community College; Mark McCarthy, East Carolina University; Helen Roybark, Radford University; Barbara Schnathorst; and Beth Woods

LearnSmart Author: April Mohr, Jefferson Community and Technical College, SW Interactive Presentations: Jeannie Folk, College of DuPage PowerPoint Presentations: Beth Kane, Northwestern University Instructor Resource Manual: Patricia Walczak, Lansing Community College Test Bank Contributors: Anna Boulware, St. Charles Community College, and Brenda J. McVey, University of Mississippi

Digital Contributor, Connect Content, General Ledger Problems, and Exercise PowerPoints: Kathleen O’Donnell, Onondaga Community College In addition to the invaluable help from the colleagues listed above, we thank the entire MA, 5e, team at McGraw-Hill Education: Tim Vertovec, Steve Schuetz, Michelle Nolte, Lindsey Schauer, Lori Koetters, Ann Torbert, Brad Parkins, Patricia Plumb, Xin Lin, Kevin Moran, Debra Kubiak, Carol Bielski, Keri Johnson, DeAnna Dausener, Sarah Evertson, Ben Pearsall, Brian Nacik, Ron Nelms, and Daryl Horrocks. We could not have completed this new edition without your efforts.

John J. Wild Ken W. Shaw

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Easy to Use. Proven Effective. McGraw-Hill CONNECT ACCOUNTING McGraw-Hill Connect Accounting is a digital teaching and learning environment that gives students the means to bet- ter connect with their coursework, with their instructors, and with the important concepts they will need to know for success now and in the future. With Connect Accounting, instructors can easily deliver assignments, quizzes, and tests online. Students can review course material and practice important skills.

McGraw-Hill Connect Accounting provides all of the following learning and teaching resources:

• SmartBook, powered by LearnSmart • Auto-graded Excel simulations • Auto-graded online homework • Interactive Presentations • General ledger problems • Guided Examples

In short, Connect Accounting offers students powerful tools and features that optimize their time and energy, enabling them to focus on learning.

SmartBook, Powered by LearnSmart McGraw-Hill LearnSmart® is the market-leading adaptive study resource that is proven to strengthen memory recall, increase class retention, and boost grades. LearnSmart

allows students to study more efficiently because they are made aware of what they know and don’t know.

SmartBook®, which is powered by LearnSmart, is the first and only adaptive reading experience designed to change the way students read and learn. It creates a personalized reading experience by highlighting the most impactful concepts a student needs to learn at that moment in time. As a student engages with SmartBook, the reading experience continu- ously adapts by highlighting content based on what the student knows and doesn’t know. This ensures that the focus is on the content he or she needs to learn, while simultaneously promoting long-term retention of material.

Use SmartBook’s real-time reports to quickly identify the concepts that require more attention from individual students— or the entire class. The end result? Students are more engaged with course content, can better prioritize their time, and come to class ready to participate.

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Tailored to You. Online Assignments Connect Accounting helps students learn more efficiently by pro- viding feedback and practice material when they need it, where they need it. Connect grades homework automatically and gives immediate feedback on any questions students may have missed. Our assignable, gradable end-of-chapter content includes a gen- eral journal application that looks and feels more like what you would find in a general ledger software package. Also, select ques- tions have been redesigned to test students’ knowledge more fully. They now include tables for students to work through rather than requiring that all calculations be done off-line. McGraw-Hill’s redesigned student interface provides a real-world feel to interactive assignments and end-of-chapter assessment content. This robust accounting software allows for flexibility in learning styles and provides opportunities for courses to be delivered in traditional, online, and blended settings.

General Ledger Problems New General Ledger problems for select questions enable students to see how transactions post from the general journal all the way through the financial statements. It provides a much-improved experience for students working with account-

ing cycle questions. Students’ work in the general journal is automati- cally posted to the ledger, navigation is much simpler, scrolling is no longer an issue, and students can easily link back to their original en- tries simply by clicking the ledger if edits are needed. Many questions now have critical thinking components added, to maximize students’ foundational knowledge of accounting concepts and principles.

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Interactive Presentations Interactive Presentations provide engaging narratives of all chapter learning objectives in an assignable interactive online format. They follow the structure of the text and are organized to match the specific learning objectives within each chapter. While the Interactive Presentations are not meant to replace the textbook, they provide ad-

ditional explanation and enhance- ment of material from the text chapter, allowing students to learn, study, and practice at their own pace, with instant feedback.

Guided Examples The Guided Examples in Connect Accounting provide a narrated, animated, step-by-step walk- through of select exercises simi- lar to those assigned. These short presentations, which can be turned on or off by instruc- tors, provide reinforcement when students need it most.

Excel Simulations Simulated Excel questions, assignable within Connect Accounting, allow stu- dents to practice their Excel skills—such as basic formulas and formatting— within the context of accounting. These questions feature animated, narrated Help and Show Me tutorials (when enabled), as well as automatic feedback and grading for both students and professors.

Easy to Use. Proven Effective. McGraw-Hill CONNECT ACCOUNTING Features

Simple Assignment Management and Smart Grading With Connect Accounting, creating assignments is easier than ever, enabling in- structors to spend more time teaching and less time managing. Simple assignment management and smart grading allow you to:

• Create and deliver assignments easily with selectable end-of-chapter questions and Test Bank items.

• Have assignments scored automatically, giving students immediate feedback on their work and side-by-side comparisons with correct answers.

• Access and review each response, manually change grades, or leave comments for students to review.

• Reinforce classroom concepts with practice assignments and instant quizzes and exams.

Powerful Instructor and Student Reports Connect Accounting keeps instructors informed about how each student, section, and class is performing, allowing for more productive use of lecture and office hours. The progress-tracking function enables you to:

• View scored work immediately and track individual or group performance with assignment and grade reports.

• Access an instant view of student or class performance relative to learning objectives.

• Collect data and generate reports required by many accreditation organizations, such as AACSB and AICPA.

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ennttt RReRepopo trtrtss

For more information about Connect Accounting, go to http://connect.mheducation.com, or contact your local McGraw-Hill Higher Education representative.

Connect Insight The first and only analytics tool of its kind, McGraw-Hill Connect® Insight is a series of visual data displays—each framed by an intuitive question—to pro- vide at-a-glance information about how your class is doing. Connect Insight provides a quick analysis on five key insights, available at a moment’s notice from your tablet device:

• How are my students doing? • How are my assignments going? • How is my section doing? • How is this assignment going? • How is this student doing?

Instructor Library The Connect Accounting Instructor Library is a repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. The Connect Accounting Instructor Library includes:

• Presentation slides. • Test Bank. • Animated PowerPoint exhibits and exercises. • Instructor’s Resource Manual. • Solutions Manual.

The Connect Accounting Instructor Library also allows you to upload your own files.

Tailored to You. Other Technology Offered by McGraw-Hill Tegrity Campus: Lectures 24/7

Tegrity Campus is a service that makes class time available 24/7 by automatically capturing every lecture. With a simple one-click start-and-stop process, you capture all computer screens and cor- responding audio in a format that is easily searchable, frame by frame. Students can replay any

part of any recorded class with easy-to-use browser-based viewing on a PC, Mac, or mobile device. Help turn your students’ study time into learning moments immediately supported by your lecture. With Tegrity Campus, you also increase intent listening and class participation by easing students’ concerns about note-taking. To learn more about Tegrity, watch a two-minute Flash demo at http://tegritycampus.mhhe.com.

McGraw-Hill Campus McGraw-Hill Campus® is a new one-stop teaching and learning experience available to users of any learning management system. This institutional service allows faculty and students to enjoy single sign-on (SSO) access to all McGraw-Hill Higher Education materials, including the award-

winning McGraw-Hill Connect platform, from directly within the institution’s website. To learn more about McGraw-Hill Campus, visit http://mhcampus.mhhe.com.

Custom Publishing through Create McGraw-Hill CreateTM is a self-service website that allows instructors to create custom course materials by drawing upon McGraw-Hill’s comprehensive, cross-disciplinary content. Instructors can add their own content quickly and easily and tap into other rights-secured, third-party sources as well, then arrange the content in a way that makes the most sense for their course. Through Create, you can: • Combine material from different sources and even upload your own content. • Personalize your product with the course name and information. • Choose the best format for your students—color print, black-and-white print, or eBook. • Edit and update your course materials as often as you’d like. Begin creating now at www.mcgrawhillcreate.com.

ALEKS: A Superior, Student-Friendly Accounting Experience Artificial intelligence: Fills knowledge gaps. Cycle of learning and assessment: Increases learning momentum and engages students. Customizable curriculum: Aligns with your course syllabi and textbooks. Dynamic, automated reports: Monitors detailed student and class progress. To learn more, visit www.aleks.com/highered/business.

CourseSmart CourseSmart is a way for faculty to find and review eTextbooks. It’s also a great option for students who are interested in accessing their course materials digitally and saving money. CourseSmart offers thousands of the most commonly adopted textbooks across hundreds of courses from a wide variety of higher education publishers. With the CourseSmart eTextbook,

students can save up to 45 percent off the cost of a print book, reduce their impact on the environment, and access pow- erful web tools for learning. CourseSmart is an online eTextbook, which means users access and view their textbook online when connected to the Internet. Students can also print sections of the book for maximum portability. CourseSmart eTextbooks are available in one standard online reader with full text search, notes and highlighting, and e-mail tools for sharing notes between classmates. For more information on CourseSmart, go to www.coursesmart.com.

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McGraw-Hill Customer Experience Group Contact Information At McGraw-Hill, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can contact our Product Specialists 24 hours a day to get product train- ing online. Or you can search the knowledge bank of Frequently Asked Questions on our support website. For customer support, call 800-331-5094 or visit www.mhhe.com/support.

Innovative Textbook Features . . .

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Using Accounting for Decisions Whether we prepare, analyze, or apply accounting informa- tion, one skill remains essential: decision making. To help de- velop good decision-making habits and to illustrate the relevance of accounting, we use a pedagogical framework we call the Decision Center. This framework encompasses a vari- ety of approaches and subject areas, giving students insight into every aspect of business decision making; see the four nearby examples for the different types of decision boxes, in- cluding those that relate to ethics. Answers to Decision Maker and Ethics boxes are at the end of each chapter.

“Authors do a good job of relating material to real-life situations and putting students in the decision-maker role.”

—MORGAN ROCKETT, Moberly Area Community College

Decision Insight

Make or Buy IT Companies apply make or buy decisions to their ser- vices. Many now outsource their information technology activities. Information technology companies provide infrastructure and services to en- able businesses to focus on their key activities. It is argued that outsourcing saves money and streamlines operations, and without the headaches. ■

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Production Manager You invite three friends to a restaurant. When the dinner check arrives, David, a self- employed entrepreneur, picks it up saying, “Here, let me pay. I’ll deduct it as a business expense on my tax re- turn.” Denise, a salesperson, takes the check from David’s hand and says, “I’ll put this on my company’s credit card. It won’t cost us anything.” Derek, a factory manager for a company, laughs and says, “Neither of you under- stands. I’ll put this on my company’s credit card and call it overhead on a cost-plus contract my company has with a client.” (A cost-plus contract means the company receives its costs plus a percent of those costs.) Adds Derek, “That way, my company pays for dinner and makes a profit.” Who should pay the bill? Why? ■ [Answers follow the chapter’s Summary.]

Decision Ethics

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Partner You are a partner in a small accounting firm that specializes in keeping the books and preparing taxes for clients. A local restaurant is interested in obtaining these services from your firm. Identify factors that are rel- evant in deciding whether to accept the engagement. ■ [Answers follow the chapter’s Summary.]

Decision Maker

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Chapter Preview Each chapter opens with a visual chapter preview. Students can begin their reading with a clear understanding of what they will learn and when, allowing them to stay more focused and organized along the way. Learning objective numbers highlight the location of related content.

Learninggg Objjeectivvvves

CONCEPTUAL C1 Distinguish between direct and indirect