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.