You are requested to deliver your auditor’s 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 meanings of the terms cost, expense , and loss ? These terms sometimes seem to identify similar items and other times seem to identify dissimilar items.”

Required:

a. Explain the meanings of (1) cost , (2) expense , and (3) 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.

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

c. 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 of items does each apply?