You were requested to personally deliver your auditor\'s report to the board of

Question

You were requested to personally deliver your auditor's report to the board of directors of Sebal Manufacturing Corporation and answer questions posed about the financial statements. While reading the statements, one director asked,"what are the precise meanings of the term, 'cost,''expense,'and 'loss? These terms seem sometimes to identify similar items and other times dissimilar items" Required (1) Explain the meanings of the terms(a)"cost,"(b)"expense,"and "loss" as used for financial reporting in conformity with generally accepted accounting principles. In your explanation, discuss the distinguishing characteristics of the terms and their similarities and interrelationships.(2) Classify each of the following items as a cost, expense, loss. or other category, and explain how the the classification of each item may change:(a)Cost of goods sold.(b)Bad debts expense.(c)Depreciation expense for plant machinery and (d)Spoiled goods. (3) The terms "period cost" and "product cost" are sometimes used to describe certain items in financial statements. Define these terms and distinguish between them. To what types of items does each apply?

Explanation / Answer

1.In accounting, though all three words that is cost, expense and loss represents outflow of funds from the company to outside world, however there is a difference in the manner in which the outflow of funds or cash happens. While cost includes both expired and deferred cost. Expired cost is the cost that has been already incurred, while deferred cost is one which has been incurred but its economic benefit is not received, prepaid expense or expenditure on research and development are some of the examples of deferred cost. An expense includes only expired cost which is used up in earning revenues in a company’s main operations. In other words it is a cost with a matching economic benefit during a particular period. Example of it includes expenses such as advertising, rent raw material cost etc…. As far as loss is concerned it is the outflow of funds or cash which arises not due to business transactions but due to some other events. For example loss due to lawsuit or due to fire in the building in case it is not insured. Hence loss is outflow of funds without any matching economic benefit. 2. cost,expense,expense,loss 3. see this link for part 3 http://www.accounting4management.com/product_costs_and_period_costs.htm

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