You are requested to deliver your auditors report personally to the board of dir

Question

You are requested to deliver your auditors report personally to the board of directors of Sebal Manufacturing Corporation and answer questions posed about the financial statements. While reading the statements, one director asks, what are the precise meaning of the terms cost, expenses, and loss? These terms sometimes seem to identify similar items and other times seem to identify similar items and other times seem to identify dissimilar items.
Required
a. Explain the meaning of (1) cost, (2) expense, and (3) 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.
b.       Classify each of the following items as a cost, expense, loss or other category, and explain how the classification of each item may change:
i.
Cost of goods sold ii. Bad debts expense iii.            Depreciation expense for plant machinery iv.            Organization costs v. Spoiled goods
a. 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 does each apply.

Explanation / Answer

A

i.   cost of goods sold :expense

ii. Bad debts expense: expense

iii. Depreciation expense for plant machinery – expense

IV Organization costs – cost

v. Spoiled goods - loss

Period costs:

Costs which are not directly related to the productions are not included in product costs. These costs are expensed on profit or loss statement when it incurred.

Example: Office rent, sales commission, selling and administration expenses

Product costs:

Costs which are directly related to production to produce goods or acquire goods can be termed as product costs.

For Manufacturing business direct labor, direct material and direct overhead are the examples.

Cost of inventory would be the example for retailers

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