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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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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

1. (a)

To determine

Elaborate the meaning of the term cost as used for financial reporting in conformity with GAAP and also explain the different characteristics of the terms and their connections and other dissimilar items.

Explanation

Generally Accepted Accounting Principles (GAAP): Generally Accepted Accounting Principles are the generally followed rules, concepts and principles which are used for the presentation of the financial information of a business organization.

Cost:  Cost is the money paid to obtain a product or any item. In other words, cost is the purchase price. Such item for which cost is paid to acquire is capitalized and classified as an asset...

1. (b)

To determine

Elaborate the meaning of the term expense as used for financial reporting in conformity with GAAP and also explain the different characteristics of the terms and their connections and other dissimilar items.

1. (c)

To determine

Elaborate the meaning of the term loss as used for financial reporting in conformity with GAAP and also explain the different characteristics of the terms and their connections and other dissimilar items.

2.

To determine

Categorize each of the following items as a cost, expense, loss, or other category, and also elaborate the manner in which the classification of each item may change.

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