Textbook Problem

Cost, Expense, and Loss

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 terms cost, expense, and loss? These terms seem sometimes to identify similar items and other times dissimilar items.”

Required:

1. 1. Explain the meanings of the terms (a) cost, (b) expense, and (c) loss as used for financial reporting in conformity with GAAP. In your explanation, discuss the distinguishing characteristics of the terms and their similarities and interrelationships.
2. 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. a. Cost of goods sold
   2. b. Bad debts expense
   3. c. Depreciation expense for plant machinery
   4. d. Spoiled goods