Question

CASE 5-5 COST, EXPENSES, AND LOSS

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

1. 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.
2. Classify each of the following items as a cost, expense, loss or other category, and explain how the classification of each item may change:

1. Cost of goods sold
2. Bad debts expense
3. Depreciation expense for plant machinery
4. Organization costs
5. 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 does each apply.

Answer 1

a).

In accounting, though all three words that is cost, cost and misfortune speaks to outpouring of assets from the organization to outside world, anyway there is a distinction in the way in which the surge of assets or money occurs. While cost includes both expired and deferred cost. Expired cost is the cost that has been already incurred, , while conceded cost is one which has been acquired yet its monetary advantage isn't gotten, prepaid cost or consumption on innovative work are a portion of the instances of conceded cost.

An expense includes only expired cost which is used up in earning revenues in a company’s main operations. At the end of the day it is an expense with a coordinating financial advantage amid a specific period. Case of it incorporates costs, for example, promoting, lease crude material expense and so forth. To the extent misfortune is concerned it is the outpouring of assets or money which emerges not because of business exchanges but rather because of some different occasions. 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.

b).

Cost, expense, expense, loss

c).

For part c see the link, which is written under hear.

http://www.accounting4management.com/product_costs_and_period_costs.htm